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Macroeconomic Model - Supply of Money Decreases

# Macroeconomic Model - Supply of Money Decreases - /P P W P...

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LECTURE 2 SUPPLY OF MONEY DECREASE

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THE MACRO ECONOMIC MODEL Introduction to Economics Class Notes Fall 2000 Charles R. Plott California Institute of Technology
Y Y i i i Spending a I a 1 I 1 a I I 1 I 1 +a 1 Y 1 Y 2 i MD T MD T Y Y P P M/P M/P M/P M * /P * P * W / P Y P UNKNOWNS .Y income .C consumption .I investment .i interest rate .P price level .L employment .MD money demand .MD T transaction demand for money .MD S speculative demand for money .w nominal wages level GIVENS G Government spending X net exports M nominal money supply b marginal propensity to consume EQUATIONS .Y=C+I+G+X .C=a(i)+bY .I=I(i) .M/P = MD .MD=MD T +MD S .MD T = MD T (Y) .MD S = MD S (i) .DL(w/P)-SL(w/P)=0 .L=SL(w/P) .Y=F(L,..)

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LECTURE 2 A SHIFT IN THE MONEY SUPPLY. THE MONEY SUPPLY DECREASES A MONETARY INDUCED RECESSION
Y Y i i i Spending a I a 1 I 1 a I I 1 I 1 +a 1 Y 1 Y 2 i MD T MD T Y Y P P M/P M/P

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Unformatted text preview: * /P * P * W / P Y P Aggregate supply exceeds aggregate demand. Price decreases have two effects. 1. Real wages increase causing unemployment.This causes aggregate supply to fall in line with aggregate demand. As money wages decrease, real wages fall increasing employment and aggregate supply. 2. The fall in prices is an increase in the real money supply. This decreases interest rates and stimulates spending and aggregate demand. Aggregate demand expands to accommodate the increasing aggregate supply. Y Y i i i Spending a I a 1 I 1 a I I 1 I 1 +a 1 Y 1 Y 2 i MD T MD T Y Y P P M/P M/P M/P M * /P * P * W / P Y P...
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