ECON 203 1nd Edition Lecture 33Outline of Last Lecture I. Long Run Aggregate Supply ShiftsII. How does the economy account for LRAS shifting?Outline of Current LectureI. Movement of aggregate demand curveII. Federal ReserveIII. Tools to change M by Fed1. Discount rate2. Open market operationsCurrent LectureI. Movement of aggregate demand curvea. A shift to the right of the aggregate demand curve indicates inflation in the economy. In the short run, prices rise and quantity rise. In the long run, prices rise and quantity returns back to Q*b. A shift to the left of the aggregate demand curve indicates deflation in the economy. In the short run, prices decline and quantity decline. In the long run, prices decline and quantity returns back to Q*II. Federal Reservea. The Federal Reserve is the entity in charge of M (money supply).b. America runs on the fiat money system- the value of money is backed by the national government. c. Banks run on a partial-reserve banking system—banks do not keep the money deposited. The loan it out to make a profit on interest. Bank run- too many people come back to get their money, and banks don’t have enough cash to give it all backIII. Tools to change M by Fed1. Discount rate- interest rate that the Fed charges banks that borrow reservesFed is the lender of last resortIncrease in discount rate- decrease in money supplyDecrease in discount rate- increase in money supply2. Open market operationsThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Most widely used tool. Open market purchase of bonds—increases money supplyOpen market sales of bonds—decreases money
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