ECON 10/7 - Aggregate Supply and Demand

Price changes and the Real Money Supply:
- Ms (Nominal Money Supply) is controlled by the central bank
- Real Money Supply = Ms / P
- Changes in price level will shift LM curve by changing the real money supply
- Purchasing power of the money supply depends on the price level (Hence Ms/P)
- r = [(c0-Ms/P)/c2]+(c1/c2)Y
- Prices go up, Ms/P goes down, as prices go up, the LM curve shifts up and to the left
- The higher the prices, the lower the level of output (GDP)

Effect on Aggregate Demand of an Increase in Ms:
- Shifts the LM curve to the right, lowering interest rates and increasing output
- Output increases for any given price level
- The effect is to shift the aggregate demand function to the right
- With classical Aggregate Supply, when Aggregate demand increases, price increases
- Is the aggregate supply function vertical? Keynes argues when the Aggregate supply function is positively sloped