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February 07, 2008
The LM Curve
The Classical Model considers the demand for money in the sense that the demand is a rigid function of transactions. That is, k is fixed.
We might think about how we derive the demand for other things.
We, however, have agreed that simply putting money in the utility function does not explain the special role of money in facilitating transactions.
The famous "sawtooth" diagram is a charming parable that explains why the transactions demand for money depends on the interest rate.
Armed with this new demand for money, we can derive the LM Curve.
Posted by bparke at February 7, 2008 09:45 PM