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ADJUSTMENT, SHORT-RUN AGGREGATE MARKET: Disequilibrium in the short-run aggregate market induces changes in the price level that restore equilibrium. If the price level is above the short-run equilibrium price level, economy-wide product market surpluses cause the price level to fall. If the price level is below the short-run equilibrium price level, economy-wide product market shortages cause the price level to rise. In both cases short-run equilibrium is restored. You might want to compare adjustment, long-run aggregate market. Price level changes induce changes in both aggregate expenditures and real production. Unlike the long-run aggregate market, changes in the price level can induce changes in short-run aggregate supply, making it greater or less than full-employment real production.

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Lesson 20: Federal Reserve System | Unit 4: Monetary Policy Page: 17 of 20

Topic: Moral Suasion <=PAGE BACK | PAGE NEXT=>

In addition to open market operations, discount rate, and reserve requirements, the Fed has an additional tool called moral suasion.

Moral suasion:

  • It is a policy in which the Fed, usually the Chairman of the Board of Governors, requests that the banking system take some sort of action.
  • These requests are usually contrary to what banks are currently doing and likely to do under current economic conditions.
  • Moral suasion can and does work in the short run, especially during crisis periods.

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AGGREGATE DEMAND SHIFTS

Changes in the aggregate demand determinants cause the aggregate demand curve to shift. The mechanism is comparable to that for market demand determinants and market demand. There are two alternatives--an increase in aggregate demand and a decrease in aggregate demand. An increase in spending by any of the four sectors--household, business, government, and foreign--shifts the aggregate demand curve to right. A decrease in spending by these four sectors shifts the aggregate demand curve to left.

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