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Unformatted text preview: factor price considered is the nominal wage rate-a single firm o SRAS changes when Nominal wage rate changes SRAS shifts LRAS does not shift Potential GDP changes Both SRAS and LRAS adjust-Aggregate Demand o Relationship between the quantity of real GDP demanded and the price level-Why demand is downward sloping? o Wealth effect affects overall desire to consume rather than our ability to spend When price level rises, real wealth decreases o Substitution effect When the price level rises, nominal interest rates rise-M/P = real money o A fall in real money stock leads to a rise in nominal interest rates o Money market Y = C + I + G + NX-Substitution effect o When price level rises, the real exchange rate rises...
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- Spring '09
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