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Macroeconomics Unit III - The Financial Sector


Below is an outline of the major topics from Macro Unit III, "The Financial Sector". As we progress through the unit over the next two weeks, try to visit this page regularly to contribute to the Unit outline. By the end of the unit, this page should represent a comprehensive study guide for the unit test.

Ch. 11 - Fiscal Policy, Deficits and Debt:
In this chapter you will learn:
  • The purposes, tools, and limitations of fiscal policy.
  • The role of built-in stabilizers in moderating business cycles.
  • How the standardized budget reveals the status of U.S. fiscal policy.
  • About the size, composition, and consequences of the U.S. public debt.
  • Why there is a long-run fiscal imbalance in the Social Security system.


Ch. 12 - Money and Banking:
"Money is the only commodity that is good for nothing
but to be gotten rid of... It imparts value only in parting."
In this chapter you will learn:
  • About the functions of money and the components of the U.S. money supply.
  • What "backs" the money supply, making us willing to accept it as payment.
  • The makeup of the Federal Reserve and the U.S. banking system.
  • The functions and responsibilities of the Federal Reserve.

Ch. 13 - Money Creation:
In this chapter you will learn:
  • Why the U.S. banking system is called a "fractional reserve" system.
  • The distinction between a bank's actual reserves and its required reserves.
  • How a bank can create money through granting loans.
  • About the multiple expansion of loans and money by the entire banking system.
  • What the monetary multiplier is and how to calculate it.


Ch. 14 - Interest Rates and Monetary Policy:
What is the all powerful "Fed"? How does the Fed's activities influence the supply of money in the economy, and in turn affect the level of output and prices? What tools does the Fed employ to achieve its monetary goals?

In this chapter you will learn:
  • How the equilibrium interest rate is determined in the market for money.
  • The goals and tools of monetary policy.
  • About the Federal funds rate and how the Fed controls it.
  • The mechanisms by which monetary policy affects GDP and the price level.
  • The effectiveness of monetary policy and its shortcomings.

Macro Unit 3 AP Economics in the News: Post your links to articles that relate to Monetary or Fiscal Policy here!

Student Thought Forum: This unit we'll try something different. You get to choose what to discuss in the thought forum. Based on a discussion in class, something you read on the blog, or just something on your mind about the current unit's topic, start a "thread" below and start a discussion about something about this unit!



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yunqimok The Fed is the Banker's Bank - what about a banker's banker's bank? (page: 1 2) 37 Apr 30 2008, 7:37 PM EDT by Kurtosis
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Thread started: Mar 7 2008, 10:45 PM EST  Watch
Commercial banks deposit their reserves in the federal reserve bank, and can also loan money from it to provide loans to its customers. The Federal Reserve bank is thus the banker's bank, as it acts the way a commercial bank acts to ordinary people, except to another bank. As such, it has the power to manipulate monetary policy, as it can control the amount of actual reserves and therefore control the amount of loans that banks can make. However, where does the Federa Reserve get all of its money? Shouldn't there be a banker's banker's bank, and so on and so forth, because all banks have to borrow from someone? How does it work?
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Charlie.Gao Does investment Demand curve shift in and out? 7 Mar 20 2008, 7:59 AM EDT by jlau21
Thread started: Mar 17 2008, 11:50 AM EDT  Watch
Okay, so we all know that Supply and Demand curves in Microeconomics can shift left and right, in and out. Same goes with the Aggregate Supply and Demand curves in Macro. But what about the Investment Demand curve? Are there any determinants that shift the curve? Or is it limited to movements along the curve itself
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