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» Economics » Topics begins with K » Key it effect

Page modified: Tuesday, July 12, 2011 21:45:41

The key it effect is a term from the macro-economic theory and describes the effect of changes of price level on the overall economic goods oh question.

In the IS-LM-model the price level is not an independent determinant of the overall economic goods oh question. Therefore price adjustments do not have direct influence on the goods oh question. However a price adjustment affects the money market. In accordance with the money market balance condition M/P = L (whereby M/P for the material money offer and L stand for the overall economic demand for money) a price level increase draws a lowering of the material money supply. From this a demand surplus on the money market results. The restaurant subjects are now ready to make securities liquid in order to satisfy their demand for money. An offer surplus on the stock market draws however acceptance in accordance with (exchange rate value = nominal interest charges/market interest) sinking courses and rising interest.

The interest is now however a determinant of the overall economic goods oh question and causes a lowering of the private net investments. From this a lowering of the goods oh question and concomitantly a lowering of the overall economic equilibrium income result, since the goods offer adapts acceptance in accordance with flexibly the goods oh question.

Changes of price level cause thus isolated seen changes of interest.

The key it effect is called also indirectly working material cash effect, since the price adjustments affect only over the money market and then over the transmission channel of the interest the goods market.

Special cases

The key it effect is ineffectively, if the private investment demand is perfectly interest inelastic, thus on changes of interest does not react. Here changes are to be only seen on the money market.

An increase of the material money supply is further by a lowering of the price level without effect on the investment demand, if we already are in the case of liquidity. The surplus offer on the money market flows now completely into the speculation cash, since the restaurant subjects want to hold money and no securities due to pessimistic interest expectations only.

See also

  • Pigou effect

Literature recommendation

  • Hans Werner Wohltmann of "fundamentals of the macro-economic theory", 4.Aufl. Oldenbourg publishing house 2005, ISBN 3-486-57843-X

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