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Chapter 11: The aggregate demand/Aggregate supply modelDemand and Supply are two domain indispensable in economics. For a long time, economists emphasize the concepts of demand and supply from different windows. Neoclassical economists resume Say’s law, which holds that supply creates its own demand, while Keynesian economists emphasize Keynes’ law, which holds that demand creates its own supply.It’s important to realize that building a strong model of aggregate demand and supply helps better understand how our economy function. In the short-run, there is a positive relationship between the price level and the level of real GDP. This is demonstrated by the upward-sloping short run aggregate supply (SRAS) curve. An increase of the price level for outputs, while the price level of inputs remains the same, the aggregate supply slopes up. The relationship between the price level for outputs and the quantity of total spending in the economy is shown by the downward sloping aggregate demand (AD). The downward sloping aggregate demand (AD) is generally generated by effects in the economy. The effects essentially are wealth effect, the interest rate effect, and the foreign price effect.Analysing the diagram of aggregate demand/aggregate supply (AD/AS) helps realize how AD and AS behave and interact. At their intersection, we have the equilibrium output and price level. Whenever productivity increases, the aggregate supply curve will shift out to the right. It will return to the left when the price of key inputs rises. And the falling of the price of key inputs will cause the aggregate demand/aggregate supply to shift out to the right. Stagflation is the combination of lower output, higher unemployment, and higher inflation.Now, let’s see how the aggregate demand curve shifts. We know that whenever the key components of aggregate demand (C, I, G, X-M) rise, the aggregate demand will shift out to the right, and return back to the left if (C, I, G, X-M) fall. These can change depending on various factors. For example, a change may occur because of different personal choices, like those resulting from consumer or business confidence, or from policy choices like changes in government spending and taxes. The risen of the equilibrium quantity of output and the price level cause the AD curve to shift out to the right. Otherwise, it causes the AD curve shifts out to the left.It is important to note that when the aggregate supply curve shifts out gradually to the right, it demonstrates a long-term economic growth. A recession is noted when the potential GDP is far above the intersection of Aggregate demand and Aggregate supply. When the intersection of aggregate demand and aggregate supply is near potential GDP, the economy is believe to be expanding.Three zones divide the short run aggregate supply. Keynes’s law that says that demand creates its own supply is located on the horizontal Keynesian zone, at the left of the short-run aggregate supply curve. Say’s law emphasizes that supply creates its own demand and this can be seen on the vertical neoclassical zone of the aggregate supply curve. The intermediate zone is located in the middle of the SRAS curve.Chapter 15: Monetary Policy and Banking RegulationCentral banks play important roles in the economy of nations. In the U.S. the equivalent of a central bank is the Federal Reserve bank. The primary goal of a central bank is to conduct monetary policy, which regulates changes to interest rates and credit conditions. Example of central banks is European Central Bank, the U.S. Federal Reserve, Bank of Japan.A bank run is when individuals who have money in a bank rush to the bank to withdraw their deposits due to uncertainty ( a bank is at financial risk of having negative net worth for example). The U.S. experienced a bank run during the great depression which contributed to worsening the situation. The risk of bank run brings fear and instability to the banking system.Deposit insurance was introduced to avoid bank run. It guarantees bank depositors that, even if the bank has negative net worth, their deposits will be protected. Bank deposits up to $250,000 are guaranteed by the Federal Deposit Insurance Corporation (FDIC) in the United States. Central Banks make sure that banks maintain positive net worth and that they behave according to laws. If banks are economically healthy, it means that the economy is doing good. Otherwise, banks failure may reduce aggregate demand in a way that can bring a recession or deepen. So, central banks help prevent weaknesses in the banking system because bank weaknesses may lead to recessions.A central bank conduct monetary policy to keep the baking system operational, and guaranteeing a financial stability. The three traditional way used by a central bank to ensure monetary policy are open market operations, reserve requirements, and discount rates. The open market operations are the action of buying and selling government bonds with banks. The reserve requirements are the number of reserves a bank is required to keep. The discount rates are, when the central bank gives loans to other commercial banks, the interest rate charged.Central banks play a key role in stabilizing the economy. They conduct monetary policy to keep the inflation at a low level. As we’ve seen these enormous tasks of central banks, they need to adopt clear and strong policy frameworks to accomplish their objectives.

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