Keynesian System4 - Keynesian System Aggregate Supply and...

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Unformatted text preview: Keynesian System Aggregate Supply and Demand Aggregate Demand and Aggregate Supply Aggregate demand and aggregate supply refer to the relationship between real national output and the price level To this point in the analysis of the Keynesian system prices and money wages have been assumed to be fixed Price Changes and the Real Money Supply The central bank controls the nominal money supply, M s The real money supply depends upon both the nominal money balances and the price level (which determines how much output the nominal balances can purchase) Real Money Supply = M s /P Changes in the price level will shift the LM curve by changing the real money supply Effect of Price Changes on the LM Curve Interest Rate Income IS LM(P ) LM(P 1 ) LM(P 2 ) P 2 >P 1 >P r r 1 r 2 Y 2 Y 1 Y Keynesian Aggregate Demand Price Level Output Y d P 2 P 1 P Y 2 Y 1 Y Effect on Aggregate Demand of an Increase in Money Supply An increase in the money supply shifts the LM curve to the right, lowering interest rates and increasing output Output increases for any given price level The effect is to shift the aggregate demand function to the right Keynesian Aggregate Demand with...
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This note was uploaded on 05/03/2009 for the course ECON 332 taught by Professor Drabicki during the Spring '08 term at University of Arizona- Tucson.

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Keynesian System4 - Keynesian System Aggregate Supply and...

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