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Once the equilibrium values of y and i s have been

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Unformatted text preview: t difference is that now we must clarify that the interest rate on the vertical axis is the policy rate i s rather than the borrowing rate i b. Once the equilibrium values of Y and i s have been determined, they can be transferred back to Figures 3A and B to determine the implied equilibrium values of i b and L as well. 7 Financial Intermediation and Macroeconomic Analysis 33 i s at which intermediaries are able to fund themselves can also increase intermediaries’ aries’ net worth, if (as is often the case) they fund longer-term assets with short-term borrowing that they must roll over, and in this case a reduction in i s will shift the XS curve curve down and to the right as well. Each Each of these effects will make the IS curve flatter (more interest-elastic) than it it would otherwise be.8 This means that a shift in the MP curve—due either to a change change in monetary policy or to a supply-side disturbance that shifts the aggregatesupply supply curve—will have a larger effect on output as a consequence of these “financial ac...
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