how do you describe the relationship between lm and lp
IS–LM model
1 ) Transactions demand for money : this includes both ( a ) the willingness to hold cash for everyday transactions and ( b ) a precautionary measure ( money demand in case of emergencies ) . Transactions demand is positively related to real GDP ( represented by Y , and also referred to as income ) . This is simply explained -- as GDP increases , so does spending and therefore transactions . As GDP is considered exogenous to the liquidity preference function , changes in GDP shift the curve . For example , an increase in GDP will increase transactions which will increase the demand for money for given interest rates , and cause the Liquidity preference curve to shift to the right . 2 ) Speculative demand for money : this is the willingness to hold cash instead of securities as an asset for investment purposes . Speculative demand is inversely related to the interest rate . As the interest rate rises , the opportunity cost of holding cash increases -- the incentive will be to move into securities .
1 ) Transactions demand for money : this includes both ( a ) the willingness to hold cash for everyday transactions and ( b ) a precautionary measure ( money demand in case of emergencies ) . Transactions demand is positively related to real GDP ( represented by Y , and also referred to as income ) . This is simply explained -- as GDP increases , so does spending and therefore transactions . As GDP is considered exogenous to the liquidity preference function , changes in GDP shift the curve . For example , an increase in GDP will increase transactions which will increase the demand for money for given interest rates , and cause the Liquidity preference curve to shift to the right . 2 ) Speculative demand for money : this is the willingness to hold cash instead of securities as an asset for investment purposes . Speculative demand is inversely related to the interest rate . As the interest rate rises , the opportunity cost of holding cash increases -- the incentive will be to move into securities .