ECO 1102 Lecture Notes - Lecture 23: Government Spending, Open Market Operation, Foreign Exchange Market

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ECO 1102 Full Course Notes
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ECO 1102 Full Course Notes
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Ad curve slopes downward because of either the wealth effect, the interest-rate effect, or the exchange-rate effect. In a closed economy, the exchange rate effect does not exist. Theory of liquidity preference (keynes): a simply theory of interest rate determination for the short run. It states that the interest rate adjusts to balance the supply of, and demand for, money in the market for money. It states that the money supply (ms) is set by the bank of canada, and does not depend on the interest rate. Open market operations are one method to change the ms (buying and selling of government bonds, foreign exchange market operations such as buying and selling of foreign currency). Problem with this theory: money demand (md) does depend on the interest rate. It re ects how much wealth people want to hold in liquid form to buy goods and services.

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