<p>Here;</p>
<p><span class="math-container">$M^d(Y,i)$</span> is the demand for money.</p>
<p><span class="math-container">$M_0$</span> is the ‘autonomous’ demand for money, i.e. demand for money that would not depend on income or interest rate.</p>
<p><span class="math-container">$M_1$</span> is the effect that real income/output has on demand for money. It will be positive because ceteris paribus when there is more goods and services around people demand more money for carrying out transactions.</p>
<p><span class="math-container">$M_2$</span> is the effect nominal interest rate has on money demand. It is actually <strong>negative</strong> not positive, and the reason why it is negative is that if interest rate is higher people demand less money both because it is more expensive to get (borrow) money and because with higher interest rate people prefer to save more and postpone their purchases to the future so they need less money.</p>

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2021-01-22T14:13:02.140Z
That was what i originally thought, it makes sense that the nominal interest is negative but my assignment says that i need to know why both $l_1$ and $l_2$ is positive, im not sure if its a mistake in the assignment text or something
Marcus F
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2021-01-22T14:17:15.843Z
@EmilB I don’t know the details of the assignment. The coefficient on interest rate is definitely negative. You can check that in any macro textbook for example Blanchard et al macroeconomics a European perspective (see chapters on IS-LM) maybe the assignment is referring to LM equilibrium  here you actually solve for output which will look like $Y=b_0 +b_1 M/P + b_2 i $ where betas will be the coefficients you get while deriving the equilibrium and M/P is the real money balance. Regardless for any clarification on what is meant by your assignment you need to contact your teacher there is
1muflon1
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2021-01-22T14:17:56.050Z
No way how strangers on the internet can know what your teacher means in his assignment. Maybe he made a typo or he means something else.
1muflon1
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2021-01-22T14:22:03.617Z
I updated it to give more information, however im not sure it even matters.
Marcus F
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2021-01-22T14:23:53.570Z
@EmilB no it does not matter
1muflon1
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2021-01-22T14:32:03.300Z
i forgot to say $M^d$ is a liquidity demand function , would it be fair to say that $M_2$ is positive because people use more money on bond funds when the rate is high, and $M_1$ is positive because people put more money in the bank when they have more money?
Marcus F
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2021-01-22T14:36:03.757Z
@EmilB but money is more liquid than bonds - that actually does not matter here. Demand for liquidity is just broader term for demand for money that will include not just money but also near money/money equivalents. M_2 is never positive in money/liquidity demand equation you can check any macro textbook there is. At least not in standard IS-LM models.
1muflon1
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2021-01-22T14:07:53.980Z
2021-01-22T14:23:38.220Z
2021-01-22T14:23:38.220Z
1muflon1
<p>An LM Curve can be described as following</p>
<p><span class="math-container">$M^d(Y,i) = M_0 + M_1Y – M_2i$</span></p>
<p><span class="math-container">$M^d = M/P$</span></p>
<p><em>M and P are exogen</em></p>
<p>I know that <span class="math-container">$i$</span> is interest rate, and Y is GDP.</p>
<p>Why is <span class="math-container">$M_1$</span> and <span class="math-container">$M_2$</span> positive? And what does <span class="math-container">$M_0$</span> represent?</p>
<p>I can't quite wrap my head around it</p>

<macroeconomics><gdp><supply-and-demand><money-supply>
LM-Curve formula question
Marcus F
# LM-Curve formula question

(Asked by: username_0 on 2021-01-22)

An LM Curve can be described as following

$M^d(Y,i) = M\_0 + M\_1Y – M\_2i$

$M^d = M/P$

*M and P are exogen*

I know that $i$ is interest rate, and Y is GDP.

Why is $M\_1$ and $M\_2$ positive? And what does $M\_0$ represent?

I can't quite wrap my head around it

**Tags:** macroeconomics, gdp, supply-and-demand, money-supply

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## 1 answers

### Answer by username_1 on 2021-01-22. Score: 1 | Accepted answer

Here;

$M^d(Y,i)$ is the demand for money.

$M\_0$ is the ‘autonomous’ demand for money, i.e. demand for money that would not depend on income or interest rate.

$M\_1$ is the effect that real income/output has on demand for money. It will be positive because ceteris paribus when there is more goods and services around people demand more money for carrying out transactions.

$M\_2$ is the effect nominal interest rate has on money demand. It is actually **negative** not positive, and the reason why it is negative is that if interest rate is higher people demand less money both because it is more expensive to get (borrow) money and because with higher interest rate people prefer to save more and postpone their purchases to the future so they need less money.

> **Comments:**
> **username_0**: That was what i originally thought, it makes sense that the nominal interest is negative but my assignment says that i need to know why both $l_1$ and $l_2$ is positive, im not sure if its a mistake in the assignment text or something  
> **username_1**: @EmilB I don’t know the details of the assignment. The coefficient on interest rate is definitely negative. You can check that in any macro textbook for example Blanchard et al macroeconomics a European perspective (see chapters on IS-LM) maybe the assignment is referring to LM equilibrium  here you actually solve for output which will look like $Y=b_0 +b_1 M/P + b_2 i $ where betas will be the coefficients you get while deriving the equilibrium and M/P is the real money balance. Regardless for any clarification on what is meant by your assignment you need to contact your teacher there is  
> **username_1**: No way how strangers on the internet can know what your teacher means in his assignment. Maybe he made a typo or he means something else.  
> **username_0**: I updated it to give more information, however im not sure it even matters.  
> **username_1**: @EmilB no it does not matter  
> **username_0**: i forgot to say $M^d$ is a liquidity demand function , would it be fair to say that $M_2$ is positive because people use more money on bond funds when the rate is high, and $M_1$ is positive because people put more money in the bank when they have more money?  
> **username_1**: @EmilB but money is more liquid than bonds - that actually does not matter here. Demand for liquidity is just broader term for demand for money that will include not just money but also near money/money equivalents. M_2 is never positive in money/liquidity demand equation you can check any macro textbook there is. At least not in standard IS-LM models.  

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