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FEDERAL RESERVE BRANCH BANK: One of 25 Federal Reserve Banks that assists Federal Reserve District Banks in carrying Federal Reserve policies. Most Branch banks are located in the expansive western states. For example, 11 Branch banks are located in just 3 Districts, San Francisco, Kansas City, and Dallas.

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Lesson 13: Aggregate Demand | Unit 3: The Curve Page: 13 of 22

Topic: Interest-Rate Effect <=PAGE BACK | PAGE NEXT=>

Changes in the interest rate can alter consumption and investment spending.

Changes in the investment and consumption spending that occur when changes in the price level cause changes in the interest rate is the interest-rate effect.

  • Investment and consumption expenditures are made with borrowed funds. The interest rate affects the cost of borrowing these funds.
  • The price level affects the interest rate:
    • A higher price level induces a higher interest rate, which raises the cost of borrowing and discourages investment and consumption.
    • A lower price level induces a lower interest rate, which reduces the cost of borrowing and encourages investment and consumption.

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SHORT-RUN AGGREGATE MARKET

A macroeconomic model relating the price level and real production under the assumption that SOME prices are inflexible, especially resource prices. This is one of two aggregate market submodels used to analyze business cycles, gross production, unemployment, inflation, stabilization policies, and related macroeconomic phenomena. The other is the long-run aggregate market. The short-run aggregate market isolates the interaction between aggregate demand and short-run aggregate supply. The key assumption of this model is that SOME prices, especially resource prices, are inflexible. The primary result of this model is that the economy can achieve short-run equilibrium at real production that is either greater than or less than full-employment.

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The portion of aggregate output U.S. citizens pay in taxes (30%) is less than the other six leading industrialized nations -- Britain, Canada, France, Germany, Italy, or Japan.
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