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ACCELERATOR: The ratio between investment expenditures and the change in gross domestic product. This is based on the notion that business investment depends on the rate of growth of aggregate output. If the economy is expanding, in other words, then the business sector invests in more capital goods to produce the extra output needed. This accelerator effect modifies and magnifies the simply multiplier effect based on the induced consumption and the marginal propensity to consume.

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Lesson 18: Banking | Unit 3: Reserve Banking Page: 12 of 24

Topic: Legal, Required, and Excess Reserves <=PAGE BACK | PAGE NEXT=>

1. Legal reserves:

  • Vault cash and deposits with the Federal Reserve that can be used to satisfy the legal reserve requirements and are needed for daily operations.

2. Required reserves:

  • The vault cash and deposits with the Federal Reserve that they have to keep to back deposits.

3. Excess reserves:

  • Any reserves over and above required reserves.
  • Excess reserves don't add to revenue and profit.

Two uses of excess reserves:

  • First: banks use them for loans.
  • Second: banks use them for investment securities.

Important point:

  • Controlling excess reserves is key to controlling the nation's money supply.

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CYCLICAL UNEMPLOYMENT

Unemployment attributable to a general decline in macroeconomic activity, especially expenditures on gross domestic product, that occurs during a business-cycle contraction. When the economy dips into a contraction, or recession, aggregate demand declines, so less output is produced and fewer workers and other resources are employed. Hence unemployment of the cyclical variety increases. Cyclical unemployment is one of four unemployment sources. The other three are seasonal unemployment, frictional unemployment, and structural unemployment.

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Today, you are likely to spend a great deal of time searching for rummage sales trying to buy either a pair of blue silicon oven mitts or a coffee cup commemorating the 2000 Olympics. Be on the lookout for high interest rates.
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