ECO 1102 Lecture Notes - Lecture 21: Liquidity Preference, Aggregate Demand, Fixed Exchange-Rate System

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ECO 1102 Full Course Notes
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ECO 1102 Full Course Notes
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Chapter 15: part 1 the influence of monetary and. The ad curve slopes downward for 3 reasons: the wealth effect, the interest rate effect, the real exchange rate effect. The interest rate effect is the most important reason for the downward slope of the ad curve. Theory of liquidity preference: keynes" theory that the interest rate adjusts to bring money supply and money demand into balance. In the following analysis, the expected rate of inflation is held constant. Boc alters the money supply using two methods: changing the bank rate, open-market operations (buy/sell federal government bonds, foreign-exch. market ops) The money supply is at a fixed quantity by boc (vertical) Although many factors determine the quantity of money demanded, the one emphasized by the theory of liquidity preferences is the interest rate. The other key determinant of the quantity of money demanded is the fact that money is used to buy g&s.

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