ECON 201 1st Edition Lecture 34Outline of Last Lecture I. Short-Run Aggregate Supply (SRAS)II. Economic Fluctuationsa. Definition of economic fluctuationsIII. The Effect of a Shift in Aggregate DemandIV. Real Life EconomicsOutline of Current Lecture I. Effects of a Shift in SRASa. Definition of stagflationII. Accommodating an Adverse Shift in SRASIII. John Maynard KeynesIV. Monetary Policya. Definition of monetary policyb. Definition of central bankV. The Federal Reserve and Its Structurea. Definition of the federal reserveb. Definition of board of governorsc. Definition of Federal Open Market Committee (FOMC)VI. Circular Flow of Bankinga. Definition of circular flow of bankingCurrent Lecture I. Effects of a Shift in SRASIn the event that prices rise, it increases costs which shifts the SRAS. The SRAS will shift to the left, at which point the real GDP will fall and unemployment will rise. When this occurs, it is called stagflation, which is a period of falling output and rising prices. The difference between inflation and stagflation is that inflation only involves prices; stagflation occurs when there is inflation and low output. Inflation is a component of stagflation. II. Accommodating an Adverse Shift in SRASIf policymakers do nothing, unemployment causes wages to fall, and the SRAS will shift right until it reaches long run aggregate supply equilibrium. However, if policymakers use policy to increase aggregate demand and accommodate an aggregate supply shift as Keynes suggests, thereal GDP will move back to what it was previously but prices will be permanently higher.These 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.III. John Maynard KeynesJohn Maynard Keynes lived from 1883-1946; he is known for his book, The General Theory of Employment, Interest, and Money, written in 1936. He argued that recessions and depression can result from inadequate demand, and that policymakers should shift the aggregate demand. An example of this is the case study of the 2008-2009 recession. From December 2007 to June 2009, real GDP fell about 4%. The unemployment rate rose from 4.4% in May 2007 to 10.1% in October 2009. The house market, and lack of demand, played a central role in this recession. Keynes’ famous critique of classical theory was the following: “This long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again.”VI. Monetary PolicyDuring periods of greater uncertainty, the public tends to hold relatively more in currency and relatively less in deposits. This action decreases the expansion of deposits from lending and the money supply decreases. Monetary policy is the setting of the money supply by policymakers inthe central bank. There are two types of monetary policy: expansionary and contractionary. The central bank is the institution that oversees the banking system and regulates the money supply. VII. The Federal Reserve and Its StructureThe federal reserve, or Fed, is the central bank of the U.S. and is in charge of conducting monetary policy. They have a dual mandate: they attempt to promote price stability and maximum employment. These two responsibilities are a constant “balancing act”. They also supervise banks, process checks and electron payments, conduct economic research, and act as a fiscal agent for the U.S. government (paying the bills). They are a lender of last resort in the United States. The structure of the fed is as follows: a board of governors manages the presidents of banks who govern our local banks. The board of governors is located in Washington D.C. and is comprised of seven members. They oversee the presidents of the twelveregional federal banks, which are located around the U.S. The Federal Open Market Committee (FOMC) includes the board of governors and presidents of some of the regions banks; the FOMC decides monetary policy. VIII. The Circular Flow of BankingThe circular flow of banking is a model that demonstrates how banks and the public interact with the Fed, as well as operations that occur between the
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