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IMPLEMENTATION LAG: In the context of economic policies, the time between the realization that a shock to the economy has occurred and corrective government action responding to the shock. This is one of several policy lags that limit the effectiveness of stabilization policies designed to correct business-cycle fluctuations. This is also one of two inside lags. The other is a recognition lag. The implementation lag, which is often divided into decision and action lags, emerges due to the time it takes for government leaders to debate, discuss, and decide on the appropriate policy then get the appropriate government agencies to launch the policy. The implementation lag is usually shorter for monetary policy than fiscal policy.

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Lesson 20: Federal Reserve System | Unit 4: Monetary Policy Page: 16 of 20

Topic: Reserve Requirements <=PAGE BACK | PAGE NEXT=>

Reserve requirements are the regulations the Fed uses to ensure banks keep enough reserves to back deposits.
  • In principle, reserve requirements can be used to control the money supply. In practice, reserve requirement changes would cause serious bank instability.
  • The Federal Reserve System is charged with ensuring that banks keep enough reserves, through legal reserve requirements.
  • Reserve requirements change over the years, keeping pace with the changing structure of the banking system.
  • They are currently in the 1% to 3% for checkable deposits. These are the reserves that banks use to cash checks, process checks, and conduct daily business.

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AGGREGATE SUPPLY SHIFTS

Changes in the aggregate supply determinants shift both the short-run aggregate supply curve and the long-run aggregate supply curve. The mechanism is comparable to that for market supply determinants and market supply. There are two options--an increase in aggregate supply and a decrease in aggregate supply. An increase in resource quantity or quality or a decrease in resource price shifts one or both of the aggregate supply curves to right. A decrease in resource quantity or quality or an increase in resource price shifts one or both of the aggregate supply curves to left.

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