LM-Curve formula question An LM Curve can be described as following
$M^d(Y,i) = M_0 + M_1Y – M_2i$
$M^d = M/P$
M and P are exogen
I know that $i$ is interest rate, and Y is GDP.
Why is $M_1$ and $M_2$ positive? And what does $M_0$ represent?
I can't quite wrap my head around it
Here;
$M^d(Y,i)$ is the demand for money.
$M_0$ is the ‘autonomous’ demand for money, i.e. demand for money that would not depend on income or interest rate.
$M_1$ is the effect that real income/output has on demand for money. It will be positive because ceteris paribus when there is more goods and services around people demand more money for carrying out transactions.
$M_2$ is the effect nominal interest rate has on money demand. It is actually negative not positive, and the reason why it is negative is that if interest rate is higher people demand less money both because it is more expensive to get (borrow) money and because with higher interest rate people prefer to save more and postpone their purchases to the future so they need less money.