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Q. Money market in the AS-AD model?
goods and the money market in the AS-AD model
We begin by studying goods market and money market when prices are no longer constant. First up is goods market.
The goods market and aggregate demand
Aggregate demand is not affected by P in the AS-AD model
as long as Y and R are held constant
YD still relies (positively) on Y and (negatively) on R and we continue to write YD = YD(Y, R) in AS-AD model. Let's justify this assumption.
Remember that aggregate demand is the sum of the demand for consumption goods, government consumption, investments and net exports. None of these components will rely on P if Y and R are held constant in AS-AD model.
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