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MACROECONOMIC THEORIES: Scientific theories that seek to explain phenomena associated with the macroeconomy. The primary phenomena investigated are unemployment, inflation, and the level of aggregate production. Macroeconomic theories also inevitably provide policy recommendations intended to improve the performance of the economy and to correct macroeconomic problems. A few of the more noted macroeconomic theories are: Classical economics, Keynesian economics, aggregate market (AS-AD) analysis, IS-LM analysis, Monetarism, and New Classical economics.

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Lesson 19: Money Creation | Unit 3: Modern Banking Page: 10 of 23

Topic: Fractional-Reserve Magic <=PAGE BACK | PAGE NEXT=>

Modern banks practice fractional-reserve banking, which is the key to money creation.

Note that:

  • Modern reserves take the form of vault cash and Federal Reserve deposits.
  • Both ensure the safety of deposits.
  • Banks seek profits by making loans and adding to checkable deposits.
  • Checkable deposits add to the money supply.
Money creation:
  1. Banks practice fractional-reserve banking, seek revenue through loans, and keep reserves.
  2. Banks keep 10% of outstanding deposits in reserves.
  3. Reserves over those required to are excess reserves.
  4. If a bank has excess reserves, then it can make loans, increase checkable deposits, and create money.

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INTERCEPT, AGGREGATE EXPENDITURES LINE

The intercept of the aggregate expenditures line indicates autonomous expenditures, aggregate expenditures that do not depend on the level of income or production. This can be thought of as aggregate expenditures that the four macroeconomic sectors (household, business, government, and foreign) undertake regardless of the state of the economy. Autonomous expenditures are affected by the aggregate expenditures determinants, which cause a change in the intercept and a shift of the aggregate expenditures line.

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Today, you are likely to spend a great deal of time at a dollar discount store looking to buy either a remote controlled World War I bi-plane or a wall poster commemorating Thor Heyerdahl's Pacific crossing aboard the Kon-Tiki. Be on the lookout for infected paper cuts.
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Two and a half gallons of oil are needed to produce one automobile tire.
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