ECN 202 1st Edition Exam #3 Study GuideLogic of Banking CrisisAsset bubble: asset rises in value-Bought with debt-loans are on bank’s balance sheets (T-accounts)-when asset bubble pops, banks assets fall in value leading to a bank runBank run: depositors remove deposits from bank and bank has to increase cash by selling mortgages-can cause banking crisis-banking crisis can often lead to deep and long recessions-credit and money tend to dry up (lending falls, spending falls, unemployment rises)-credit crunch-interest rates go up-lending dries up-debt overhang-asset bubble leads to high debt levels-backed by lower-valued assets-Fiscal policy-goal is to shift AD-expansionary=shift right-contractionary=shift left-government decrease spending-decrease in output-decrease in inflation-3 uses of money:Medium of exchange (cash)-unit of account (assets)-store of value (economy wide)-M1-measure of money supplied (liquid assets, checking, cash)-M2-less liquid assets (savings accounts, money market funds)-Monetary base-portion of commercial bank reserves that is maintained at central bank + money circulating in market-assets: loans, reserves, buildings, property -liabilities: all deposits taken in-government can change the monetary base through open market transactions (T-bills)-T-bill selling=bond selling = decrease monetary base-T-bill buying= increase monetary base-money multiplier: money added to bank leads to increase in money supply-deposit amount * (1/reserve ratio) = money multiplier-central bank of US: Federal Reserve Bank-sets requirements-sets discount rates-open market transactions-money demand-interest rate as the “price” of money-shifts in the money demand-money in long run-all prices adjust, move back to LRAS-money is neutral in long run-real interest rate returns to normal-goal of expansionary monetary policy:-increase output by increasing investment-short run Phillips Curve-demand curve-higher inflation and lower unemployment-shifts to SRPC-supply shocks -changes to expected