Search results
Results From The WOW.Com Content Network
The money market equilibrium diagram. The LM curve shows the combinations of interest rates and levels of real income for which the money market is in equilibrium. It shows where money demand equals money supply. For the LM curve, the independent variable is income and the dependent variable is the interest rate.
This equation tells us that the growth of money wages rises with the trend rate of growth of money wages (indicated by the superscript T) and falls with the unemployment rate (U). The function f is assumed to be monotonically increasing with U so that the dampening of money-wage increases by unemployment is shown by the negative sign in the ...
Changes in either of these variables as well as a number of possible supply shocks will shift the dynamic aggregate supply curve. [5]: 409 [12] The long-run aggregate supply curve is affected by events that affect the potential output of the economy. These include the following shocks which would shift the long-run aggregate supply curve to the ...
Keynes's simplified starting point is this: assuming that an increase in the money supply leads to a proportional increase in income in money terms (which is the quantity theory of money), it follows that for as long as there is unemployment wages will remain constant, the economy will move to the right along the marginal cost curve (which is ...
The 45-degree line represents an aggregate supply curve which embodies the idea that, as long as the economy is operating at less than full employment, anything demanded will be supplied. Aggregate expenditure and aggregate income are measured by dividing the money value of all goods produced in the economy in a given year by a price index.
The Lucas islands model is an economic model of the link between money supply and price and output changes in a simplified economy using rational expectations. It delivered a new classical explanation of the Phillips curve relationship between unemployment and inflation. The model was formulated by Robert Lucas, Jr. in a series of papers in the ...
If the LM curve is vertical, then an increase in government spending has no effect on the equilibrium income and only increases the interest rates. If the demand for money is not related to the interest rate, as the vertical LM curve implies, then there is a unique level of income at which the money market is in equilibrium. Thus, with a ...
However, because prices are sticky in the New Keynesian model, an increase in the money supply (or equivalently, a decrease in the interest rate) does increase output and lower unemployment in the short run. Furthermore, some New Keynesian models confirm the non-neutrality of money under several conditions. [69] [70]