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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.
The hypotheses are: The null hypothesis, infers that a unit root exists, whereas the alternative hypothesis, concludes that there is no root. Decision rule:
#“Nominal GDP declined between 2008 and 2009, therefore the GDP deflator must also have declined.”
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