Introduction - 13:03 Introduction Earlierchapterscovered: o

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13:03 Introduction Earlier chapters covered: o The long run effects of fiscal policy on interest rates, investment, economic  growth o The long run-effects of monetary policy on the price level and inflation rate This chapter focuses on the short-run effects of fiscal and monetary policy,  which work through aggregate demand. o Aggregate Demand Curve o -recall the AD curve slopes downward for three reasons: the wealth effect the interest rate effect (most important) lower price level leads to lower  interest rates the exchange-rate effect Theory of Liquidity Preference o A simple theory of the interest rate (denoted r) o R adjusts to balance supply and demand o Money supply: assume fixed by central bank, does not depend on the  interest rate o Regardless of what the interest rate, central bank will set the money  supply o Money demand reflects how much wealth people want to hold in liquid 
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Introduction - 13:03 Introduction Earlierchapterscovered: o

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