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Unformatted text preview: -raise reserve requirement-raise the discount rate-sell bonds-Interest Rates and Spending (T-85):-The Fed can stimulate the economy in three distinct steps:-increase the money supply-reduce the interest rate-increase AD-The opposite would occur with a tight money policy-Liquidity Trap (T-86): Shows the possibility that interest rates may not respond to changes in the money supply (really low rates of interest)-The equation of exchange: MV = PQ-could also be stated as M = PQ / V V = PQ / M MV / Q = P M = money supply V = velocity (# of times the $ is spent) P = average price of goods Q = quantity of goods sold in a period-Natural rate of unemployment: the long-term rate of unemployment determined by structural forces in labor and product markets-Real interest rate = nominal interest rate - anticipated inflation-Bottom line: our success is determined by our macroeconomic performance...
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