Bridging the Gap between the Interest Rate and Price Level Approaches in the AD-AS Model: The Role of the Loanable Funds Market
There are two generally accepted ways of plotting the aggregate demand (AD) and aggregate supply (AS) curves in the goods market. One puts the price level on the vertical axis (the P - y approach); the other plots the real interest rate on the vertical axis (the r - y approach). This paper develops the theoretical connections between these two approaches that permit one to tell a coherent dynamic story with the AD-AS model and also explores the conditions under which one approach or the other yields greater insight into the working of the model.
Volume (Year): 29 (2003)
Issue (Month): 3 (Summer)
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- Grossman, Herschel I., 1969. "Theories of markets without recontracting," Journal of Economic Theory, Elsevier, vol. 1(4), pages 476-479, December.
- Ferguson, J David & Hart, William R, 1980. "Liquidity Preference or Loanable Funds: Interest Rate Determination in Market Disequilibrium," Oxford Economic Papers, Oxford University Press, vol. 32(1), pages 57-70, March.
- S. Kirk Elwood & T. Windsor Fields, 1998. "Does the International Substitution Effect Help Explain the Slope of the Aggregate Demand Curve?," The Journal of Economic Education, Taylor & Francis Journals, vol. 29(4), pages 358-364, January.
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