Question

Serial correlation in dynamic models is likely. Its detection is not likely to be unbiased with the use of the D.W. test. But the LM multiplier test is valid. How is the LM multiplier performed in this case?

Answer 1

(LM) curve represents the amount of money available for investing (supply).It is explained as the decisions made by investors when it comes to investments with the amount of money available and the interest they will receive. Equilibrium is achieved when the amount invested equals the amount available to invest.The IS-LM model describes the aggregate demand of the economy using the relationship between output and interest rates.

The LM curve tells you all combinations of Y and r that equilibrate the money market, given the economy’s nominal money supply M and price level P. That is, the LM curve is the set of all Y and r combinations that satisfy the money market equilibrium condition, real money demand must equal the given real money supply:

Md(Y,r) =M/P