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Unformatted text preview: i 2 , there is still excess demand for money ( XS B2 =XD M2 ) and people continue to sell bonds ( Bd2 to Bd3 ) putting further downward pressure on bond price and raising interest rate to a higher level. Until the bond price has fallen to P B* and interest rate has risen to i* such that the opportunity cost of holding money is high enough to reduce quantity demand for money to M* , then there will be no more excess demand for money in the money market (the money market is in equilibrium ). According to Walras Law , the bonds market is also in equilibrium ( B S +M S =B D +M D and MS=MD implies BS=BD )....
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This note was uploaded on 10/05/2010 for the course ECO 349 taught by Professor H during the Fall '09 term at University of Toronto.
- Fall '09