ECON - Ch. 22 The Roaring Twenties

ECON - Ch. 22 The Roaring Twenties - The Roaring Twenties...

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Also, reflected some prejudice eader of LR, and deposit incurance was rare The Roaring Twenties (Ch. 22) I. Introduction A. A Brief Overview o Real GNP Growth Rate (1920-29) = 4.2 % per year (on average) o Real GNP Per Capita Growth Rate (1920-29) = 2.7 % per year (on average) However, the decade started and ended with significant recessions: o Short, but intense recession of 1920-21 o B. While economists disagree on causes of Great Depression, the 1920s may hold clues to understanding the 1930s. As you study the 1920s, look for signs of underlying “structural weaknesses” that may help explain the Great Depression. C. Recall (from Econ 2105): Aggregate Demand (at a given price level) = Aggregate Expenditures C + I + G + (EX – IM) If fed ↑PR banks have excess reserves Banks feel less conservative about their reserve holdings (If fed ↓ RR banks have excess reserves) Loans / ↓ Interest Rates ↑M C↑ + I↑ (AD↑) Expansionary Monetary Policy Banks feel more conservable about their reserve (If fed ↑RR banks have reserve shortage) holdings ↓ Loans / ↑ Interest Rates ↓ M C↓ + I↓ (AD↓ ) Contractionary Monetary Policy This might be used to lower inflation 3 “traditional” monetary policy tools of the Federal Reserve (Consider how each policy tool affects the monetary base & bank reserves .) 1. Discount Rate: interest rate the Fed charges commercial banks for short-term (“overnight”) loans If Fed ↓ DR: If Fed ↑ DR: 2. Reserve Requirement: % of liabilities (deposits) that commercial banks are required to hold as reserves If Fed ↓ RR: banks have excess reserves Banks feel less conservative about their reserve holdings ↑ Loans / ↓ Interest Rates ↑M C↑ + I↑ (AD↑) Expansionary Monetary Policy If Fed ↑ RR: banks have reserve shortage Banks feel more conservable about their reserve holdings ↓ Loans / ↑ Interest Rates ↓ M C↓ + I↓ (AD↓ ) Contractionary Monetary Policy This might be used to lower inflation
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3. If Fed buys bonds: (↑ monetary base) ↑ bank reserves ↑ loans/ (excess reserves) ↓ interest rates ↑ M C↑ + I↑ AD ↑ Expansionary Monetary Policy If Fed sells bonds: ↓ bank reserves ↓ loans / (↓ monetary base) ↑ interest rates ↓ M C↓ + I↓ AD↓ Contractional Monetary Policy Note: the “fed funds rate” Interest rate that commercial banks charge each other for short-term (“overnight”) loans Current FFR target (since 12/16/2008): 0-.25% June 2006 target: 5.25% II. 1921-22 Depression A. 1919: WWI ends. US economy doing well because: Cont'd deficit spending by federal government
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ECON - Ch. 22 The Roaring Twenties - The Roaring Twenties...

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