Q. Money market in the AS-AD model?
goods and the money market in the AS-AD model
We begin by studying goods market and money market when prices are no longer constant. First up is goods market.
The goods market and aggregate demand
|
Aggregate demand is not affected by P in the AS-AD model
as long as Y and R are held constant
|
YD still relies (positively) on Y and (negatively) on R and we continue to write YD = YD(Y, R) in AS-AD model. Let's justify this assumption.
Remember that aggregate demand is the sum of the demand for consumption goods, government consumption, investments and net exports. None of these components will rely on P if Y and R are held constant in AS-AD model.