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MARKET ANALYSIS: The use of the market model to examine economic phenomenon involving demand, supply, prices, and exchanges. The simplest market analysis involves identifying equilibrium price and quantity, which is the point of intersection between the demand and supply curves. Some of the more useful market analysis, however, involves comparative static analysis of shifts in either the demand or supply curves, or both curves simultaneously. Other market analysis examines the consequences of price ceilings, price floors, and taxes.

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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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INDUCED GOVERNMENT PURCHASES

Government purchases that depend on income or production (especially national income and gross domestic product). That is, changes in income induce changes in government purchases. Induced government purchases reflect the observation that the government sector (especially state and local governments) is inclined to use tax revenue, which increases with income, for purchases. They are measured by the marginal propensity for government purchases (MPG) and are reflected by the positive slope of government purchases line. The alternative to induced government purchases is autonomous government purchases, which do not depend on income.

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Today, you are likely to spend a great deal of time looking for a downtown retail store seeking to buy either a three-hole paper punch or decorative picture frames. Be on the lookout for pencil sharpeners with an attitude.
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Okun's Law posits that the unemployment rate increases by 1% for every 2% gap between real GDP and full-employment real GDP.
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