Final Exam Review for Intro To Macro

Shift of aggregate demand federal funds rate rate

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shift of aggregate demand
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 federal funds rate rate banks charge each other to borrow reserves  open market purchase reduced interest rates increased bank reserves increased money supply  open market sale increased interest rates decreased bank reserves decreased money supply  prime rate rate that banks charge to its best customers (low risk)  sub prime rate rate that banks charge to its worst customers (high risk)  role of banks transform liquid assets to illiquid ones create money source of loans to businesses solve moral hazard and adverse selection problems  moral hazard incentive to use lean funds incorrectly after transaction  adverse selection bad credit risks often the most likely to apply for loans  bullish
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less betting against the economy  bearish more betting against the economy  supply and demand for bank reserves demand is by banks, supply is by the Fed  quantitative easing strategy of convincing the public that the fed will keep interest rates very low by providing substantial reserves for as long as possible  liquidity trap when expanding the money supply no longer lowers the interest rate  monetary policy and lags short implementation lag long impact lag  fiscal policy and lags long implementation lag short impact lag  Taylor rule set fed funds rate according to inflation and output gaps  fed funds rate equation ff rate = inflation + 1/2(output gap)  inflation targeting fed funds rate inflation + inflation gap  why can't the fed push on a string
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fed cannot lower interest rates  Federal reserve purpose lender of last resort  yield curve management buying long term treasuries to lower long term interest rates  monetization of debt if the Fed bought newly issued securities, it's equivalent to printing more money  Federal reserve facts central bank of US has twin mandates of maximum sustainable economic growth and price stability uses open market operations as main policy tool  Fed Reserve structure board of governers Federal open market committee 12 banks that own the fed  Fed goals price stability maximum employment  inflation increase in average level of prices  deflation decrease in average level of prices 
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inflation is good for good for borrowers  inflation is bad for bad for lenders  indexed payments where dollar amount changes with the rate of change in price level  hyperinflation inflation rate in excess of 200% per year  deflation is good for good for lenders  deflation is bad for bad for borrowers  price index number whose movement reflects movement in average level of prices  how to compute a price index compile market basket set base period compute cost of market basket in this period
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