Consider the money market to better understand the horizontal LM curve in this chapter. The LM relation (equation 5.3) is M P = Y L(i) a. What is on the left-hand side of equation (5.3)? b. What is on...

Consider the money market to better understand the horizontal LM curve in this chapter. The LM relation (equation 5.3) is M P = Y L(i)

a. What is on the left-hand side of equation (5.3)?

b. What is on the right-hand side of equation (5.3)?

c. Go back to Figure 4.2 in the previous chapter. How is the function L(i) represented in that figure?

d. Modify Figure 4.2 to represent equation (5.3) in two ways. How does the horizontal axis have to be relabelled? What is the variable that now shifts the money demand function? Draw a modified Figure 4.2 with the appropriate labels.

e. Use your modified Figure 4.2 to show that (1) as output rises, to keep the interest rate constant, the central bank must increase the real money supply; (2) as output falls, to keep the interest rate constant, the central bank must decrease the real money supply.