Overview
Money demand is denoted by L. It is taken to be a function of interest rates and income.
Real money balances is the ratio of the total money supply {% M %} to the overall price level, {% P %}. Real money balances are set by the Central Bank and are taken as exogenous to the model. (that is, fixed)
{% L = L(r, Y) %}
Money demand is downward sloping as a function of the interest rate, {% r %}. That is,
as the rate goes up, people demand less money balances, because they would rather leave those balances
to earn the higher rate of the return.
Real money balances is the ratio of the total money supply {% M %} to the overall price level, {% P %}. Real money balances are set by the Central Bank and are taken as exogenous to the model. (that is, fixed)
Keynesian Cross Charted
The LM curve is thought to be upward sloping when plotted against income/output on the x-axis, and the interest rate on the y-axis.
The Income slider lets you adjust the level of income. As income increases, money demand goes up. As real money supply is fixed, this raises interest rates.