The LM curve is one half of the IS-LM model, a macroeconomic model that examines the relationship between a country’s GDP, economic output, and interest rates. In particular, the IS-LM model’s two curves represent two markets. While John Hicks is the official graphical creator of the LM (and IS) curve, it’s really just a graphical representation of what John Maynard Keynes wrote originally.
The LM curve stands for liquidity preference (the “L”) and the money supply (the “M”). On the graph, where the real interest rate (r) is on the y-axis and real GDP is on the y-axis, the LM curve is upward sloping.
The LM curve slopes upward because the more the economy is abuzz; people are willing to pay more to borrow money (i.e. pay higher interest rates). With the economic reality of supply and demand in the borrowing market, crossing with the constraints of the IS curve (investment-saving), we get an equilibrium GDP output and interest rate.
The LM curve is one half of a union that puts pretty much the entire macroeconomy on one graph. Keynes and Hicks were onto something in their free time. So, uh...what did you do on Saturday?
Related or Semi-related Video
Finance: What is liquidity preference?27 Views
finance a la shmoop. what is liquidity preference?
yeah well liquidity is a good thing you want it. being liquid means that you have
cash which gives you options to you know buy stuff. and yeah even the Amazon River [money leaves a wallet in the grocery store]
shops at Amazon. all right so if your flavor of
investment has a liquidity preference over someone else's then your investment
all else being equal is preferable. see the liquidity preference . specifically if
you have liquidity preference and usually this is found in the form of
early stage of venture capital investor term sheets for investing in companies
in the form of convertible preferred stock- like it converts into common at
the IPO or something like that- then you get paid before everyone else
gets paid -at least in this form of stock- if the company gets sold.
all right well technically that is, but the company is sold and your convertible
preferred hasn't converted into common shares yet this company didn't go public. [convertible stock made into common stock]
but so like let's think about the example where if the company raised
twelve million bucks in preferred stock, which all had a liquidity preference
over and above common ,and then the whole company was sold for just fifteen
million dollars. well then those with liquidity preference would get liquid
first .ie they get their twelve million bucks. then the remaining three million
would be sprinkled around everyone else who was do the dough. plus any dividends
or accrued assets that have come our way otherwise. and yes technically debt
holders get paid ahead of the various series preferred investors who then get [list of who gets paid first]
paid ahead of the common shareholder but that's a different video. all right so
when it comes down to it you want to have liquidity preference. clearly I
prefer to be liquid myself. [man floats in lake in an inner tube]