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.


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