By Sanjay Rode
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Extra resources for Advanced Macroeconomics
More receipts of money are added into credit account where payments are added in debit. The account summary of debit and credit is regularly available from all the transactions. The debits are paid from the credits and the balance is maintained. Money is used for accounting purposes. How much your employer will pay you in wages , how much you owe the bank , how much a firm has earned and how much a bond is worth are all recorded in some unit of account (Gordon 1998). 3. Store of value Money is used as a medium of exchange and it is stored to pay or buy goods and services.
The price level increases and the output also increase up to Y1. It is a short term effect. The supply cannot increase in the long run because all the factors of production are fully employed. The output Y0 remains unchanged in the long run. Therefore the aggregate supply curve shifts back to AS1. The aggregate demand curve and aggregate supply curve intersect each other at E3. It is new equilibrium in the long term. In the long run, aggregate output does not change only the price level increases from P0 to P1.
8 shows that the money demand and money supply are at equilibrium at E. The interest rate is constant at income level Y. As the money demand shifts from Md to Md1, then the interest rate also rises from I to I1. At the same time income rises from Y to Y1. As there is more and more demand for money, it further increases the income. But at the same time, interest rate also rises. It means the LM curve shows the link between the interest rate and the income. It is a positive relationship between the two variables.