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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 M_D is affected by P if we keep Y and R constant. In AS-Ad model, M_D 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 M_D(Y, R, P) in AS-AD model.

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Macroeconomics, Economics

Category:- Macroeconomics
Reference No.:- M9577745

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