ECON KNOW.

ECON KNOW. - Money Supply If you increase the MS you HAVE...

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Money Supply: If you increase the MS, you HAVE to increase prices. The velocity of money is the rate at which money changes hands. If the Fed reduces the discount rate, the supply of money will grow. When the Fed lowers the discount rate, banks’ reserves increase, banks borrow more than otherwise from the Fed, and banks start lending more. When the Fed reduces the reserve requirement, the money multiplier gets bigger. Unemployment: Cyclical unemployment is closely associated with short-run ups and downs of the economy. The natural rate of unemployment is the amount of unemployment that the economy normally experiences. Efficiency wages do NOT increase worker turnover; they reduce the incentive to shirk. Tools of the Fed: When the Federal Reserve conducts open-market operations to increase the money supply, it buys government bonds from the public. If the Fed conducts an open market purchase of bonds, this would result in higher prices int he short run and unchanged output in the long run. An increase in the money supply might indicate that the Fed had purchased bonds in an attempt to reduce the federal funds rate. The Fed’s primary tool to change the money supply is conducting open market operations.
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This note was uploaded on 04/24/2009 for the course ECON 2105h taught by Professor Staff during the Spring '08 term at UGA.

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ECON KNOW. - Money Supply If you increase the MS you HAVE...

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