types of unemployment
frictional, structural, cyclical
frictional unemployment
temporary job loss during normal job search (e.g., finding better work or first job after school)
cyclical unemployment
Unemployment caused by a general downturn in economic activity
structural unemployment
caused by technological change or shifts in demand that make some jobs obsolete
the unemployment rate
The percentage of the United States Labor Force that is unemployed
Unemployment Rate= [U/U+E]x100
consequences of unemployment rate
High unemployment rates mean that real GDP is lower than it could be.
More employed people mean more productivity, which means higher standards of living
aggregate demand
shows the relationship between Real GDP and the price level in the economy
as price level increases, real GDP decreases and vice versa
there is a shift in the AD curve if there is a change in any of its components: C, I, G, Xn
(rightward shift is an increase)
aggregate supply
Shows the relationship between Real GDP and price level
input prices (wages, oil prices etc.) or productivity (technological advances)
leftward shift is an increase
know equilibrium graphs
increase and decrease in AD
increase and decrease in AS
banks
A financial intermediary that uses bank deposits to finance investment
functions of banks
earn profits by making loans
do not loan ALL of their deposits due to having to provide depositors their funds ON DEMAND
The fraction of the deposits the banks keep on demand is called the RESERVES
Fractional Reserve Banking
Banks are required by law to keep a certain minimum required reserve
Anything they keep in addition is called excess reserves
This banking system allows banks to “create” money to expand the money supply
The deposit Expansion Multiplier
1/rr
In our example, the reserve requirement (rr) is 10% so the deposit expanion multiplier is is (1/0.1), which equals 10. This means that for every dollar of new excess reserves, the money supply will increase by $10.
to find total amount of money created do the following…
expansions of MS = excess reserves+multiplier
total money supply=expansion of MS + initial deposit (use decimal form)
loan from bank to bank
Bank 1 must keep required reserves in the amount of $100
Bank 1 can loan out $900.
Bank 2 receives a loan in the amount of $900.
Bank 2 must keep required reserves in the amount of $90.
Bank 2 can now make loans in the amount of $810.
the federal reserve system
The central bank of the United States
Oversees and regulates the banking system
Controls the money supply
Make up of 12 privately owned district banks and a board of governors
the federal reserve system 4 functions
Provide financial services to banks (reserves, cash, check clearing)
Supervise and regulate banks for safety and soundness
Maintain financial stability by providing liquidity
Conduct monetary policy to manage economic fluctuations
the Fed’s goals
Promote max employment, stable prices, and moderate long-term rates.
LOW INTEREST RATES promote spending and investment that leads to increased employment (expansionary monetary policy)
HIGH INTEREST RATES present inflation and promote price stability (contractionary monetary policy)
reserve requirement
INCREASE IN RR Contractionary
DECREASE IN RR Expansionary
The fed sets the percentage of bank deposits that must be held as reserves
Greater excess reserves lead banks to expand credit, which expands the money supply
discount rate
INCREASE IN DR Contractionary
DECREASE IN DR Expansionary
Discount Rate → Interest rate banks pay to borrow from the Fed.
Lower rates → banks borrow more reserves → money supply expands.
open market operations
BUY BONDS - expansionary
SELL BONDS - contractionary
The Fed buying and selling U.S. treasury bonds
When the fed buys bonds, it increases the banks reserves, thus increasing the money supply
Fed buys bonds → bank reserves increase → money supply increases.
Expansionary Fiscal Policy
Used in a recession when AD is too low.
Gov’t spends more or cuts taxes → AD increases → higher employment & price level → budget deficit.
money supply increase, lonable funds increase, interest rates decrease
Contractionary Fiscal Policy
Used to fight inflation when demand is too high.
Gov’t cuts spending or raises taxes → AD decreases → lowers inflation but may reduce RGDP & jobs → budget surplus.
money supply decrease, lonable funds decrease, interest rates increase
FINISH PACKET STUFF AND FLOW CHART STUFF
