00:01
So here we're told to apply the asad model.
00:03
So the first thing we should do before anything else is sketch the adas model, right? this is a story about prices and output.
00:09
Aggregate demand slopes down.
00:11
Aggregate supply slopes up.
00:13
So now we have an adas model and we have some reference level for where prices and output are going to start.
00:20
We're now told there's a shock.
00:22
Something disrupts this, right? there is going to be a decrease in money demand.
00:29
That's how i'm reading this.
00:31
So there could be lots of reasons that we have to decrease money demand, but we have to map that into this model somehow, right? and aggregate demand and aggregate supply are sort of imperfect ideas for this.
00:45
So let's try to translate money demand if i draw a money market into aggregate demand, aggregate supply language.
00:53
Money supply is usually vertical.
00:54
Money demand is downward sloping as a function of the nominal interest rate.
00:58
Money demand is going to fall.
01:02
So for any interest rate, people will demand less money.
01:05
This leads to a lower nominal rate.
01:08
So here we start to get some subtraction.
01:11
The decrease in the money demand is going to lower interest rates.
01:17
When money is less desired, the cost of renting money will fall, right? so what does this do? this is good for consumption and investment.
01:28
Investment, right? with cheaper money, people will want to buy more cars, buy more houses, companies will want to build more factories, right? cheaper credit encourages economic activity.
01:39
So i'm going to model this as an ad shift out.
01:43
This is not affecting the business model of firms directly...