The long-run supply curve under pure competition is derived by observing what happens to market price and quantity when market:
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Xpansionary
Opn market op: cb buys 1m worth bond,amount bond it holds
>1m abd so is the amount of money in economyBalance sheet cb: assets
(bonds)liabilities(reserves+currenc) effect xpansionary opn mrkt op: assets
(change bond hold +1m) liabilities (chang money stok +1m)Liquidy:once people
Enough money 4 transct purp,they’re indifernt between money in bonds pay same
I. Baja i=md sube people want more money and fewe bond more liquidity. Balance
Bank: asset (reserves,loans,bonds)liability(deposit account)à withdraw cash,cheques,reserve ratio 2 j-curve:a depreciate
May lead to an initial deteriorate of trad balance Esube;X+IM bajn. (Xsub,IMbaj,
Esub)à(X-EIM)subeaggregate supply relat captures
Effects of outpt on the P.It’s derivd from the behaviour of wages and
Prics.W=PeF(u,z) P=(1,u)Wfor a given labor force,the higher the
Output the lower the unempl rate 1-(Y/L)AS relation 2
Propert:increase expected price levels leads to increase in the actual price
Levl.This work through wages. Is upward sloping. Increase Pe shifts AS up and
Decrease in Pe shifts the AS down. Aggregate demand relation
Captures the effect of the price level on output.It’s derived from the eq conditions
In goods+finance mkts.Changes in other vble differ from price level shif
Aggregt dmnd to right.Neutrality of money: P
Increase and effect monetary expansion on output and on I dissaper. This refers
To the fact that an increase in the nominal money stock has no effect on output
Or the I in the medium run.Increase in the nominal money stock is absorbed by
An increase in the price level.