Micro Economics

May 20th, 2015
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Aberystwyth University
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Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and government decisions.Macroeconomics and microeconomics, and their wide array of underlying concepts, have been the subject of a great deal of writings. The field of study is vast; here is a brief summary of what each covers:

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Interest Rates in the Short-Run - (Back to Top)In the previous chapter, there were three effects that led to the downward slope of the aggregate demand curve - the Pigou Wealth effect, the Keynes Interest Rate effect and the Mundell-Fleming Exchange Rate effect. Of these three, the Keynes Interest Rate effect is by far the most important (the Pigou effect is small because money holdings are a very small portion of household wealth, and the Mundell-Fleming effect is small because net exports are a small portion of GDP). This section expands on the Keynes Interest Rate effect by developing Keynes's theory of liquidity preference. theory of liquidity preference - Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance . The AD-AS model is a short-run model that describes economic fluctuations around the long-run trend. The theory of liquidity preference is a short-run model of interest rate determination.Money SupplyIn the US economy, the money supply is determined by the Fed. Recall that the Fed can either increase or decrease the size of the money supply through open market operations, changing reserve requirements, or changing the discount rate. Since the money supply is a policy variable determined by the Fed, it is drawn as a vertical line.Money DemandRecall that one of the reasons money has value is that money is the most liquid of all assets in the economy. The liquidity of money comes from the fact that mo

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