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Q. Demand for money for AS-AD model?
The money market
The demand for money depends negatively on R,positively on Y and positively on P in AS-AD model
When P is no longer exogenous, we should figure out how MD is affected by P if we keep Y and R constant. In AS-Ad model, MD increases as P increases (and vice versa).
Imagine that P is increased by 10% whereas Y and R are constant. All nominal variables such as nominal GDP, nominal consumption and nominal income will then increase by 10%. This means that you would need to hold more money to pay for the increase in consumption. Consequently the demand for money is signified by MD(Y, R, P) in AS-AD model.
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THE PRODUCT MARKET Z=C+I+G C=a+bYd I=Io+I1Y-I2i Equilibrium condition, Y=Z, where Y represents output and Z is aggregate spending. THE FINANCIAL MARKET Md=MT+Mp MT=MTo+MT1Y Mp=Mpo
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