In the short term, output is unchanged while the price level rises. The real money supply is decreased by the price increase, which causes the LM curve to shift upward and raise the interest rate. Investment and output remain unchanged, however, because the interest rate has no impact on them.
(The abbreviation LM, short for liquidity-money, is also conventional.) The LM curve identifies the ranges of income and interest rates at which the domestic economy is in asset or stock equilibrium and the demand for money (or desired liquidity) equals the money supply.
A two-dimensional macroeconomic tool called the IS-LM model, often known as the Hicks-Hansen model, illustrates the connection between interest rates and the asset market.
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