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FEDERAL FUNDS RATE: The interest rate that banks charge each other when loaning bank reserves through the federal funds market. This is a key interest rate in the economy because helps to determine banks' minimum cost of getting funds. If the federal funds rate is higher, then banks are likely to raise the interest rates they charge, like the prime rate, home mortgage rate, or rate on car loans.

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Lesson Contents
Unit 1: Basic Flow
  • Overview
  • Four Sectors
  • Three Markets
  • The Physical Flow
  • The Payment Flow
  • Unit 1 Summary
  • Unit 2: Financial Markets
  • The Paper Economy
  • Saving
  • Investment
  • Unit 2 Summary
  • Unit 3: Government
  • What It Does
  • Taxes
  • Government Purchases
  • Government Borrowing
  • Unit 3 Summary
  • Unit 4: Foreign
  • Foreign Trade
  • Exports and Imports
  • Unit 4 Summary
  • Unit 5: Real World
  • Expenditures
  • Production And Income
  • Investment
  • Government Spending
  • Saving
  • Unit 5 Summary
  • Course Home
    Circular Flow

    This lesson introduces the circular flow model of the macroeconomy. The circular flow is a simple model based on the buying and selling relation between the household and business sectors which occurs through the product and factor markets. As a bonus, we complicate the simply circular flow model, by including the government and foreign sectors, and the financial markets. This lesson introduces several important macroeconomic concept, but more importantly, provides a useful model for interpreting macroeconomic activity.

    • In the first unit, we get an introduction to the simplest circular flow model that includes the household and business sectors and the product and factor markets.
    • The second unit builds on the simple model by introducing the financial markets, which highlights the importance of household saving and business investment.
    • The circular flow is expanding further in the third unit, with the introduction of the government sector, which highlights how taxes are diverted away from the household sector.
    • The fourth unit adds one more sector to the circular flow model, the foreign sector, which illustrates the roles played exports and imports.
    • The fifth unit wraps up this lesson by showing how several key measures of production and income revealed in the analysis of gross domestic production related to the circular flow.

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    AGGREGATE DEMAND INCREASE, SHORT-RUN AGGREGATE MARKET

    A shock to the short-run aggregate market caused by an increase in aggregate demand, resulting in and illustrated by a rightward shift of the aggregate demand curve. An increase in aggregate demand in the short-run aggregate market results in an increase in the price level and an increase in real production. The level of real production resulting from the shock can be greater or less than full-employment real production.

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    Today, you are likely to spend a great deal of time wandering around the downtown area looking to buy either a rechargeable battery for your computer or shoe laces for your snow boots. Be on the lookout for high interest rates.
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