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Western University
Economics 2152A/B
Ayoub Yousefi

The Asset Market Equilibrium Condition - Equilibrium in money market, M/P = L(Y,r + π ) e Real money balances Demand for real money A) M is determined by the central bank B) Labour market determines the level of employment , which in turn determines Y C) Given Y and π (fixed for now) the goods market condition determines r With all the variables determined in a b and c the asset market equilibrium condition determines the price level To illustrate the role of price level, e) P = M/ L(Y, r + π ie. The price level is the ratio of the nomial money supply to real money demand ∆P/P = inflation = ∆M/M = rate of change in money supply - e) e ∆L(r + π / L(r + π ) = rate of change in real money demand Pg. 254 from textbook #1 d M /P = 5000 + 0.2Y – 1000i I = interest paid on non-monetary assets I = 0 (interest paid on money) P = 100, Y = 1000, I = 10% d A) M /P = 5000 + 0.2(1000) – 1000(0.10) = 5,100 B) M = M /100 = 5,100  M = 510,000 C) V = Nominal GPD/Nominal money stock = Y.P/M = 1000(100)/510,000 = 0.196 P = 200 now A) M /P
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