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Suppose that the economy is at its natural rate (Y = _Y). Just recently there has been a permanent decline in money demand. Assuming price

Suppose that the economy is at its natural rate (Y = _Y). Just recently there has been a permanent decline in money demand. Assuming price rigidity in the short run (horizontal SRAS) and using IS-LM, AD-SRAS-LRAS curves,

illustrate and explain what will happen to r, P, I, and Y in the short run and in the long run in the absence of any monetary or fiscal policy.

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