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Topic 5 - Asset Markets & The IS-LM Model 1/ Introduction In this note, we are going to provide a link between asset prices and the demand side of the economy. We will consider asset markets such as the stock market or house/ real estate markets and how the impact on aggregate demand. We will emphasize that agents are forward looking in terms of consumption and investment decisions which allows this link to be made. In addition, if the government is funding spending through running a fiscal deficit, then the funding of this deficit will have implications for AD. If the government is running a deficit, it can fund this by either * Issuing bonds * Expanding the nominal money stock i.e. where Dt is the fiscal deficit at time t Gt is government spending at time t Tt is tax revenue at time t Bt is the stock of bonds. Therefore ?Bt is the change in the stock of bonds...

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