O expansion ad curve shifts outward intersection sras

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price level will be lower than before. o Expansion AD curve shifts outward, intersection SRAS at a higher price level and GDP and not at the LRAS SRAS will shirt inward because workers will push for higher wages and work less so economy will return to long run equilibrium…but at a higher price level than before o Supply Shock
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SRAS curve shifts inward because of crazy increase in price of inputs or something, Will intersect AD at a lower GDP and a higher price level creating Stagflation – Inflation and recession. SRAS slowly shifts back outwards as workers are willing to accept lower wages, long run equilibrium is achieved. Dynamic Aggregate Demand And Aggregate Supply Model o Potential GDP increases continually o AD shifts right each year o SRAS shifts right each year Usual Cause of Inflation o If Total Spending grows more than total production, prices rise. (AD increases more than SRAS) Chapter 25 Money, Banks, and Federal Reserve System Money – Any asset that people are willing to accept in exchange for goods and services or for payments of debts. Measuring Money o M1 = Currency + Value checking account deposits + Value of travelers checks o M2 = M1 + savings deposits + small time deposits + money market shares Banks can Create Money o By loaning out all but the required reserves of a deposit again and again, banks can create additional money. o Simple Deposit Multiplier = 1/RR o Change in checking account deposits = Change in bank reserves * 1/RR Federal Reserve System – Manages the money supply with monetary policy o Open Market Operations – Buying and Selling of treasury securities. Buy to increase money supply. Sell to decrease. o Discount Policy – Discount rate of interbank loans o Reserve Requirements – Fed can reduce required reserve ratio to produce excess reserves. Quantity Theory of Money o V = (P x Y)/M V – Velocity of money – average number of times each dollar in the money supply is used to purchase goods and services included in GDP M – Money Supply, P – Price Level, Y – Real Output o A theory about connection between money and prices ASSUMES VELOCITY IS CONSTANT. Chapter 26 Monetary Policy – uses monetary policy targets to indirectly affect the unemployment and inflation rates. Monetary Policy Targets – money supply and interest rates The Interest Rate is the opportunity cost of holding money o Holding money as currency gets no interest, putting it in financial assets does yield interest
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Demand for money is downward sloping o When interest rates are low, opportunity cost of holding money is low so quantity of money demanded will be high o Money demand shifts with GDP and Price Level changes Positive relationship with GDP – Increases in gdp shift money demand outward Positive relationship with Price Level – increase in price level shifts money demand outward. Money Market – Equilibrium occurs where money demand equals money supply o Money Supply is a vertical line.
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Christopher Reinemann
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