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Unformatted text preview: ECO 320L, Fall 2010, Professor Beatrix Paal updated 10/8/2010 10:19 AM Lecture 19: More on the LM curve, Money market graph 1 Lecture 19 More on the LM curve, Money market graph Last time (review rational expectations) aggregation in the asset market Walras Law ( Chapter 7.4 ) start the LM curve ( Chapter 9.3 ) Today continue the classical version of the LM curve ( Chapter 9.3 ) the Keynesian interpretation of the LM curve money market equilibrium graph ( Chapter 9.3 ) general equilibrium Next time business cycle measurement and facts ( Chapter 8.1, 8.2, and 8.3 ) Money market equilibrium Numerical example Problem g = G , g = u , = U , = u , = Gu The money demand curve is Calculate the equilibrium price level. Solution the money demand curve implies that g = G . therefore, expected inflation can be calculated as = = u . = + = 4u . then we can substitute and into the money demand curve to figure out real money demand: the last step is solving for from = = 800 10 = 2 500 D Y L i = 1000 10 500 500 0.04 D Y L i = = = PDF Created with deskPDF PDF Writer  Trial :: http://www.docudesk.com ECO 320L, Fall 2010, Professor Beatrix Paal updated 10/8/2010 10:19 AM Lecture 19: More on the LM curve, Money market graph 2 The LM curve classical How do we represent the equilibrium price level in the general equilibrium graph? for a fixed level of g and G each point in the general equilibrium graph (i.e. each combination of and ) corresponds to a certain price level there are multiple combinations of and that give the same price level an LM curve graphs combinations of and for which the price level is the same b to derive the slope of the LM curve, we ask the following question: In response to a change in , how does have to change to keep the equilibrium price level unchanged? there is a different LM curve corresponding to every possible price level is a shifter of the LM curve b we will look at how a change in P shifts the LM curve notation: () or ( = ) changes in g , G and other determinants of money demand are also shifters of the LM curve b in particular, monetary policy 3 4 PDF Created with deskPDF PDF Writer  Trial :: http://www.docudesk.com ECO 320L, Fall 2010, Professor Beatrix Paal updated 10/8/2010 10:19 AM Lecture 19: More on the LM curve, Money market graph 3 The LM curve numerical example continued problem Continue to assume that g G = u , = U and = u . The money demand curve is We saw that this implies that expected inflation is = u ....
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This note was uploaded on 10/25/2010 for the course ECO 320L taught by Professor Kendrick during the Fall '10 term at University of Texas at Austin.
 Fall '10
 KENDRICK

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