ECN 301 Chapter Notes - Chapter 9: Nominal Interest Rate, Real Interest Rate, Monetary Policy

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The is curve is a combination of real interest rates and real gdp such that the goods market is in equilibrium, holding all other determinants of aggregate expenditure fixed. The lm curve is a combination of real interest rates and real gdp such that the money market is in equilibrium holding all other determinants of money demand and the real money supply fixed. It tells us how interest rates are determined when the stock of money is fixed. Is-lm provides our analysis of the determinants of real gdp and the interest rate when money stock is fixed. Because a change in the real interest rate changes autonomous spending, it will. If we put the two interest rate terms in the equation for autonomous spending percentage-point increase in interest rates reduces spending by an amount together; =[(cid:2868)+(cid:2868)++((cid:1850)(cid:3033)(cid:1851)(cid:3033)+(cid:1850) (cid:3033))] (cid:4666)+(cid:1850) (cid:4667) we see a 1- (cid:4666)+(cid:1850) (cid:4667) sensitivity of autonomous spending (cid:4666)+(cid:1850) (cid:4667) times the multiplier.

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