ECON 1BB3 Lecture Notes - Lecture 24: Aggregate Supply, Aggregate Demand, Liquidity Preference
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Y = c + i + g + nx. Ad: y = c + i + g + nx. The ad curve has a negative slope for three reasons: P: wealth effect, interest rate effect, real exchange rate effect. Y = c _i + g + nx: interest rate effect. 15 - liquidity preference theory) money pays no interest, bonds pay interest, need money only to buy stuff, int. rate = opp. cost of holding money. P decrease, people buy same quantity of stuff => need less money (m decreases, shifts left), y = c(increase) + i + g + nx y increase: real exchange rate effect. P decreases, (ep decreases/ p*) decreases, cdn gets cheaper relative to foreign gds exports increase, imports decrease => nx increase y increase. Anything other than p that affects c, i, g, or nx will cause the ad curve to shift.
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