Question
The economy is a closed economy and is currently producing at its full potential. Suppose that people finally realize that they must save a larger
The economy is a closed economy and is currently producing at its full potential. Suppose that people finally realize that they must save a larger portion of their income in order to be able to retire and live with a reasonable level of comfort and that they simultaneously begin to use a new payment technology, which allows them to reduce their holdings of real cash balances as a proportion of their income. In the context of the AS-AD model, explain the effects of these changes on the short-run equilibrium levels of output and real money balance. Also, support your answer by ONE AS-AD diagram.
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