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CSS Micro Macro Economics P-I QUESTION #1692
Question 1
In the IS-LM model of macroeconomic equilibrium, the LM curve traces out all combinations of income and interest rates at which:
  • The goods and services market is in equilibrium
  • The government budget is balanced
  • The money market (financial market) is in equilibrium✔️
  • None of these
Correct Answer Explanation
The LM curve (L = Liquidity preference, M = Money supply) represents all combinations of real income (Y) and interest rate (r) at which the money market is in equilibrium — where money demand equals money supply (\(L(Y, r) = M/P\)). As income rises, money demand increases, requiring a higher interest rate to maintain equilibrium. The IS curve represents equilibrium in the goods market.