THE
IS–LM
MODEL
245
How is the demand for money going to be met with a fixed money sup-
ply?
Essentially, individuals rebalance their portfolio of financial assets by sell-
ing bonds in order to acquire the money balance required to finance the higher
transactions associated with income
Y
1
. The increase in the supply of bonds, in
turn, causes the price of bonds to fall and the nominal interest rate, which is
inversely related to the price, to rise till
i
1
, where demand and supply for real
money balances are again equal. We plot the combinations of nominal interest
rate and income such as (
i
0
,
Y
0
) and (
i
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