4-9 Notes - SR LR Y P-U Inf-r i-I Explanation in the SR as...

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Under the Keynesian view, since there are excess funds in the capital market, the real interest rates will be so low that it cannot go lower. Therefore, expansionary monetary policy will be ineffective as interest rate cannot go down anymore to spur investment. Hence in the short-run, the equilibrium will stay at E1 where SAS1 and AD intersects. In the long-run, the equilibrium will shifts to E2 (the point where SAS2, LAS, and AD intersects) as price falls. Here are the directions of the change in outcomes when there is an expansionary monetary policy under Keynesian view:
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Unformatted text preview: SR LR Y P-U Inf-r i-I Explanation: in the SR, as monetary policy is ineffective, all variables will not change; in the LR, as monetary policy is always neutral, Y and U won’t change. Price falls as we see from the above. Real interest rate won’t change as the demand and supply for funds in the capital market remain the same, and nominal interest rate falls as r doesn’t change but price falls. Investment doesn’t change as Y and r don’t change. LAS SAS1 AD E1 E2 SAS2...
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This note was uploaded on 04/13/2009 for the course ECON 20091_ECO taught by Professor Mohammadsafarzadeh during the Fall '09 term at USC.

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