Lecture_19_2010_M - Today AD-AS model Intermediate...

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Intermediate Macroeconomics Bruce Preston April 6, 2010 Today AD-AS model Chapter 12 Further Details Fo rmon e ta rypo l i cytoa > ect output requires departures from the Classical Dy- chotomy Recall in the long run money supply determines the price level Has no a > ect on the real economy Sticky prices in the short-run break the dychotomy But why don’t prices adjust immediately in the short run? Microfoundations: Sticky Prices Various sources of rigidity costly information and computation about your own market costly information and computation about the economy: and therefore MP price and wage contracting related: costly bargaining – leads to wage and price contracts for several periods social norms: notions of fairness – e.g. wages should not decline
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Microfoundations: Determination of Interest Rates Monetary policy conducted in terms of Fed funds rate How does this relate to the money supply? Represents the market clearing interest rate in the market for money Microfoundations: Determination of Interest Rates II What determines the demand for money? Interest rate represents the opportunity cost of holding money Generally non-interest bearing (you hold because of liquidity value) Changes in nominal rates imply changes in the real return for ±xed inflation expectations Higher interest rates less money all else equal W Shift portfolio into other assets
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This note was uploaded on 02/27/2011 for the course ECONOMICS 201 taught by Professor P during the Spring '11 term at Columbia College.

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Lecture_19_2010_M - Today AD-AS model Intermediate...

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