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# review3 - Monetary Policy Rules and Aggregate Demand Rt r m...

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Monetary Policy Rules and Aggregate Demand ) ( π π - = - t t m r R The IS Curve ) ( ~ r R b a Y t t - - = The AD Curve ) ( ~ π π - - = t t m b a Y

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The Aggregate Supply Curve o Y t t t + + = - ~ 1 υ π π t Y ~ 0 o t + - 1 π AS

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The Steady State: π π = - 1 t t Y ~ t π 0 π AD AS
The Dynamic Algebra of AD and AS o Y m b a Y t t t t t + + = - - = - ~ ) ( ~ 1 υ π π π π Rearrange: [ ] [ ] o a m b m b o m b a t t t t t + + + = + + - - + = - - υ π υ π π υ π π υ π π 1 1 1 ) ( Solve: υ + + υ + π υ + υ + π = π - m b o a m b m b t t 1 1 1

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Comparative Advantage: An Algebraic Example Northern Economy: Workers of Number orker produced/w Computers orker produced/w Apples : : : N N N L z x Southern Economy: Workers of Number orker produced/w Computers orker produced/w Apples : : : S S S L z x
Autarky S S S N N N S S N N z x p z x p x w x w = = = = 2 2 2 2 2 2 2 2 2 2 2 2 S S S S S N N N N N S s S S N N N N S s S N N N z x z x c z x z x c x w c p x w c p x w a x w a = = = = = = = = = = = =

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Free Trade with Complete Specialization Apples Computers : n Productio World S S N
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