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14.02_lecture_13

14.02_lecture_13 - AS A S A D Aggregate Demand Curve(AD So...

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AS AS A AS-AD AD
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Aggregate Demand Curve (AD) So far we have worked in the space {Y,r}. Wh t h t t d d if P i i ? What happens to aggregate demand if Prices increase? The AD curve is drawn in {Y,P} space. It represents how the demand side of the economy responds to a change in prices responds to a change in prices. As P decreases (holding everything else fixed), M s /P increases. As the supply of real money balances increase to have an equilibrium in the money market interest rate needs money balances increase to have an equilibrium in the money market interest rate needs to fall, and hence from the equilibrium in the good market, I and C rise! Prices affect the demand side of the economy through interest rates. Recall: prices do not affect C (if wages change 1 for 1 with prices PVLR will not change!) 2 The AD curve comes directly from the IS-LM equilibrium. So, in essence, the AD curve is a representation of BOTH the IS curve AND the LM curve.
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