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interest rate

i_real=i_norminal-rate of inflation

Change in i -> change in exchange rate [ER]

Who supply loanable funds?

Individual saving, business, government, foreigner

Who demands loanable funds?

Individual loans, business loans, government, foreigner

What happens when the money supply increases?

The economy can grow.

Quality theory of money

mv=PQ

m=money supply

v=velocity of money

P= price level

Q=GDP_r

Real interest rate

Interest rate that is adjusted to inflation

Nominal interest rate

The interest rate unadjusted for inflation.

What happens when interest rate decreases?

There is more business.

Aggregate Demand

AD=C+I+G+Xd-Im

What does change in money supply do?

Change in Ms-> change in i_r-> change in I->change in AD-> change in GDP_n-> change in price level and RGDP

Cost-Push inflation

When the cost of production rises, there are changes in SRAS and PL

Demand-pull inflation

When there is too much demand relative to quantity supplied, there are changes in AD and PL

Money Market

Liquidity preference[Md]

The money market is affected by the change in interest rate nominal.

The Ms is perfectly inelastic.

Loanable Funds Market

Very similar to the normal S&D graph, but the y-axis is i_r.

Loanable funds are affected by the real interest rate.

How can interest rates be shifted?

When there is a change in either D_LF or S_LF

How can SRAS be shifted?

By the changes in cost of production [land, labor, capital]

Inflationary gap

When [AD=SRAS]> LRAS.

On the right side of the LRAS in the AS&AD graph.

Recessionary gap

When [AD=ARAS]<LRAS.

On the left side of the LRAS.

Stagflation

When the price level is rising and the economy is in a recession.

Three types of Unemployment

Frictional- voluntary/healthy

Structural-Skills are no longer needed 

Cyclical-Business cycle