<p>Usually, <span class="math-container">$i$</span> is used to denote the nominal interest rate for the LM equation, so
<span class="math-container">$\frac{M}{P}=L(Y,i)$</span> shows a relationship between real money supply <span class="math-container">$\left(\frac{M}{P}\right)$</span>, real GDP <span class="math-container">$(Y)$</span>, and nominal interest rate <span class="math-container">$(i)$</span>.</p>
<p>The real and nominal interest rate are related in the following way:<span class="math-container">$\quad i=r-\pi^e$</span>
Therefore, if expected inflation <span class="math-container">$(\pi^e)$</span> is 0, then there is no distinction between the nominal interest rate and the real interest rate.</p>
<p>Now if you rewrite the LM equation as: <span class="math-container">$M=PL(Y,i)$</span> you will get a relationship between the nominal money supply <span class="math-container">$(M)$</span> , nominal GDP <span class="math-container">$(PY)$</span> , and the nominal interest rate <span class="math-container">$(i)$</span></p>
<p>For example, suppose Money Demand function is: <span class="math-container">$L(Y,i)=\frac{Y}{i}$</span>
then LM curve is given by <span class="math-container">$\frac{M}{P}=\frac{Y}{i}$</span> but we can use the above transformation to express the relationship in nominal terms, i.e., we can rewrite <span class="math-container">$M=\frac{PY}{i}$</span></p>

CC BY-SA 4.0
2023-05-01T11:17:11.770Z
I am still not sure about your question, but I was hoping this answer is what you're looking for. If not let me know, I'll edit it accordingly
mynameparv
CC BY-SA 4.0
2023-05-01T11:15:14.497Z
2023-05-01T11:29:48.403Z
2023-05-01T11:29:48.403Z
mynameparv
<p>Given <span class="math-container">$ M / P = L(Y, i) $</span>, where <span class="math-container">$M/P$</span> is the real money supply, and <span class="math-container">$Y$</span> is GDP, <span class="math-container">$i$</span> being the interest rate, we know that this equation makes demand of money equal to supply of money. Therefore, could we use <span class="math-container">$M$</span> instead of <span class="math-container">$M/P$</span> for nominal supply of money, and consider nominal instead of real GDP, and therefore find nominal instead of real interest rates? In what way do these variables relate in that sense?</p>

<inflation>
Change values from nominal to real in LM portion of ISLM?
john
# Change values from nominal to real in LM portion of ISLM?

(Asked by: username_0 on 2023-05-01)

Given $ M / P = L(Y, i) $, where $M/P$ is the real money supply, and $Y$ is GDP, $i$ being the interest rate, we know that this equation makes demand of money equal to supply of money. Therefore, could we use $M$ instead of $M/P$ for nominal supply of money, and consider nominal instead of real GDP, and therefore find nominal instead of real interest rates? In what way do these variables relate in that sense?

**Tags:** inflation


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## 1 answers

### Answer by username_1 on 2023-05-01. Score: 1

Usually, $i$ is used to denote the nominal interest rate for the LM equation, so
$\frac{M}{P}=L(Y,i)$ shows a relationship between real money supply $\left(\frac{M}{P}\right)$, real GDP $(Y)$, and nominal interest rate $(i)$.

The real and nominal interest rate are related in the following way:$\quad i=r-\pi^e$
Therefore, if expected inflation $(\pi^e)$ is 0, then there is no distinction between the nominal interest rate and the real interest rate.

Now if you rewrite the LM equation as: $M=PL(Y,i)$ you will get a relationship between the nominal money supply $(M)$ , nominal GDP $(PY)$ , and the nominal interest rate $(i)$

For example, suppose Money Demand function is: $L(Y,i)=\frac{Y}{i}$
then LM curve is given by $\frac{M}{P}=\frac{Y}{i}$ but we can use the above transformation to express the relationship in nominal terms, i.e., we can rewrite $M=\frac{PY}{i}$

> **Comments:**
> **username_1**: I am still not sure about your question, but I was hoping this answer is what you're looking for. If not let me know, I'll edit it accordingly  

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