Money Supply: Controlled by the central bank, an increase in money supply shifts the LM curve right, lowering interest rates. A decrease shifts it left, raising rates.
Money Demand Sensitivity to Income: The LM curve’s slope depends on how much money demand responds to income changes. Highly responsive demand makes the LM curve steeper, as income changes lead to more pronounced interest rate adjustments.
Money Demand Sensitivity to Interest Rates: When money demand is sensitive to interest rate changes, people hold less money at higher rates, flattening the LM curve. Low sensitivity makes it steeper.
Central Bank Policy: Central banks influence the LM curve through interest rate adjustments and open market operations. Lower rates encourage spending and investment, shifting the LM curve right, while higher rates shift it left.
Price Level: Rising prices decrease the real money supply, shifting the LM curve left. Lower prices increase real money supply, shifting it right.
