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Unformatted text preview: 1 CHAPTER 10 Aggregate Demand I Ch 10. ISLM model This slide is for LM model and short term equilibrium 2 CHAPTER 10 Aggregate Demand I The Theory of Liquidity Preference A simple theory in which 3 CHAPTER 10 Aggregate Demand I Money supply The supply of real money balances is fixed: ( 29 s M P M P = M/P real money balances r interest rate M P 4 CHAPTER 10 Aggregate Demand I Money demand Demand for real money balances: M/P real money balances r interest rate ( 29 s M P M P 5 CHAPTER 10 Aggregate Demand I Equilibrium The interest rate adjusts to equate the supply and demand for money: M/P real money balances r interest rate ( 29 s M P M P L ( r ) 6 CHAPTER 10 Aggregate Demand I How the Fed raises the interest rate To increase r , Fed reduces M M/P real money balances r interest rate 1 M P L ( r ) r 1 r 2 2 M P 7 CHAPTER 10 Aggregate Demand I CASE STUDY: Monetary Tightening & Interest Rates Late 1970s: > 10% Oct 1979: Fed Chairman Paul Volcker...
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This note was uploaded on 10/25/2011 for the course ECON 321 taught by Professor Sani during the Spring '08 term at Rutgers.
 Spring '08
 sani

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