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Q. What do you mean by Capital Flows?
With free capital flows, this is a very unreasonable assumption. If we domestic interest rate increase against the foreign interest rates, capital will flow into our country that would drive down the domestic interest rate again.
Most reasonable models in that domestic interest rate is affected by foreign interest rates are more complicated. To understand such models, you should first understand models where this complication doesn't arise. Additionally predictions from models where domestic interest rate isn't affected by foreign interest rates are fairly similar to more realistic models which allows for capital flows.
Q. Demand for money and GDP? The demand for money also relies on the GDP as GDP is closely associated to national income. If you choose to hold a fixed proportion of your wealt
Suppose the banking system has reserve of $750000, demand deposits of $2500000 and a reserve requirement of 20%. a. if the fed now purchases $125,000 worth of govt bonds from the
Subsistence theory of wage determination
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