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ASSUMPTIONS, KEYNESIAN ECONOMICS: The macroeconomic study of Keynesian economics relies on three key assumptions--rigid prices, effective demand, and savings-investment determinants. First, rigid or inflexible prices prevent some markets from achieving equilibrium in the short run. Second, effective demand means that consumption expenditures are based on actual income, not full employment or equilibrium income. Lastly, important savings and investment determinants include income, expectations, and other influences beyond the interest rate. These three assumptions imply that the economy can achieve a short-run equilibrium at less than full-employment production.

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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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PERFECTLY ELASTIC

An elasticity alternative in which infinitesimally small changes in one variable (usually price) cause infinitely large changes in another variable (usually quantity). Quantity is infinitely responsive to price. Any change in price, no matter how small, triggers an infinite change in quantity. This characterization of elasticity is most important for the price elasticity of demand and the price elasticity of supply. Perfectly elastic is one of five elasticity alternatives. The other four are perfectly inelastic, relatively elastic, relatively inelastic, and unit elastic.

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Today, you are likely to spend a great deal of time at a crowded estate auction hoping to buy either a box of multi-colored, plastic paper clips or several orange mixing bowls. Be on the lookout for pencil sharpeners with an attitude.
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Francis Bacon (1561-1626), a champion of the scientific method, died when he caught a severe cold while attempting to preserve a chicken by filling it with snow.
"You are never given a dream without also being given the power to make it true."

-- Richard Bach, Author

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