midterm 2 Flashcards
circular flow diagram
model of economy that shows how households and businesses are linked
total output, income, spending, are all equal
on the circular flow diagram: total output must be equal to …..
and total spending must be equal to…..
total spending, total income
gdp per capita (per person)
total gdp/population
gdp
market value of all final goods and services produced within a country in a year
gdp is total spending on
final goods, including new inventories
gdp (y) = (categories of spending)
consumption + investment + government spending + net exports
gdp only counts…. goods and does not account for …… goods
input costs are not included in gdp
final, intermediate
consumption
ex) household purchases
household spending on final goods and services
investment
spending on new capital assets that increase economy’s productive capacity
transfer payments
transfer income from one entity to the next
government to individual
not counted in gdp
exports
goods or services produced domestically and purchased by foreign buyers
imports
goods or services produced in a foreign country and purchased by domestic buyers
net exports
spending on exports- spending on imports
also called trade balance
value added
amount by which value of an item is increased at each stage of production
value added =
total sales - cost of intermediate inputs
gdp is the total income which is the sum of
total wages and total profits
capital gains and losses are counted as
new income
labor’s share of total income is
declining
3 ways to measure gdp: gdp is
total spending, total output, total income
3 ways to measure gdp: it can be measured by
y=c+i+g+nx
sum of total value added
total wages + total profits
3 ways to measure gdp: measurement is called
gdp, value added, gross domestic income
6 limitations of gdp:
1) prices are not values
2) non market activities are not included
3) misses the shadow economy
4) doesnt count environmental degradation
5) leisure does not count
6) gdp ignores distribution
nominal gdp
gdp measured in today’s prices
real gdp
gdp measured in constant price
can we account for price changes to see if economy has grown over time in value
nominal gdp =
p*q
real gdp =
avg p *q
calculate nominal gdp using …. prices
current
calculate real gdp using …… prices
constant
% change in nominal gdp=
% change in real gdp + % change in prices
only works when the years are close together
how to scale big numbers
1) evaluate what it means per person
2) compare big numbers to size of their own history
3) use rule of 70 to evaluate long run growth rates
4) compare big numbers to size of economy
rule of 70
doubling time (years) =
70/ annual growth rate
economic growth
ability of society to produce more over time
making the economic pie bigger
how can we increase circular flow model?
flow of real resources
wood, labor, electricity, groceries, services
flow of money
spending to acquire inputs, spending to buy outputs
market value
value everything goes into gdp at its market price
e^10 , e^9
ten bil, bill
calculate gdp by
asking people how much they spent, asking people how much they produced, asking people how much they earned
imports do not factor into gdp because
they already count into consumption and investment
production functions
methods by which inouts are transformed into output
determines total production possible with a set of ingredients
how inputs turn into outputs
aggregate production function
links gdp to labor, human capital, and physical capital
how much of everything a country can produce
human capital
accumulated knowledge and skills that make a worker more productive
physical capital
tools/machinery/structures that are inputs in production process
production function:
Y= f…
(L,H,K)
output is a function of labor, human capital, and physical capital
a country will produce more if
it employs more labor
workers become highly skilled, accumulating human capital
accumulates more physical capital
output depends on
L,H,K and recipe for inputs/outputs
population growth boosts total gdp but not
gdp per capita
dependency ratio
number of people too old or too young to work per 100 people of working age
labor productivity
quantity of goods and services that each person produces per hour of work
capital stock:
total quantity of physical capital that can be used in production of goods and services
technological progress
new methods for using existing resources
new recipe for combining ingredients
constant returns to scale
increasing all inputs by same proportion will cause output to rise by the same proportion
doubling inputs means outputs will double
diminishing returns to capital
law of diminishing returns
catch up growth
enjoyed by poor countries, rapid growth that occurs when a relatively poor country invests in physical capital
capital stock will grow as long as
investment outpaces depreciation
depreciation
decline in capital due to wear and tear, obsolescence, accidental damage, aging, when price of a currency falls
physical capital per worker will eventually start
declining
capital accumulation cant sustain
long term economic growth
what shifts the production function
technological progress
technology allows us to break the cycle of poverty. it has 3 good features
ideas can be freely shared, ideas do not depreciate with use, ideas may promote other ideas
however, ideas are nonexcludable
why do institutions matter for public growth?
property rights
government stability
efficiency of regulation
property rights
control over tangible or intangible resources
provide incentive to invest in capital, maintain resources, develop a new tech
government stability
instability discourages investment and innovation
efficiency of regulation
make it no harder than necessary for people to start businesses and invest
ex) not hard to start a business in the US
encouraging innovation: government policy
create incentives through intellectual property laws
subsidize r and d
institutions that promote economic growth
property rights
gov stability
efficient regulation
gov policy that encourages innovation
imports dont make gdp smaller because
they cancel out
profits
share of money we spend going to businesses
wages
share of money we spend going to workers
gdp is a good proxy for economic well-being
decreases infant mortality, increases life expectancy, education, life satisfaction
how to calculate real gdp
1) find y1 and y2 average
2) compute GDP for both years using avg price
3) calculate growth if necessary
growth = (using real gdp)
(real gdp (this)- real gdp (last))/ real gdp (last)
gives gdp as a growth rate
to get as a percent, multiply by 100
growth = (as a percent change in real gdp)
% change in real gdp= % change in nominal gdp - % change in prices
even as world population grows,
growth grows at the same pace but is unevenly distributed
use real gdp
small growth rates build up
dispartity and inequality we see across the world emerged over time, not all at once
working age population
16 and older who are not in military or institutionalized
employed
working age population who are working
unemployed
working age population without jobs who are trying to get jobs
4 requirements to be considered unemployed
part of working age population
not currently working
actively searching for work
able to accept a job if it were offered
labor force
unemployed + employed
not in the labor force
working age population who are neither unemployed or employed
labor force participation rate =
(employed + unemployed)/ working age population
*100
differs for men and women
shows how many potential workers are working
unemployment rate
unemployed/labor force
- 100
percent of labor force that is unemployed
varies across groups, fluctuates over time but is never 0
equilibrium unemployment rate
long run unemployment rate to which economy tends to return
dynamic labor market makes it
easier for people to find new jobs
most job seekers are …..
most unemployment spells are …..
employed, short
long term unemployment
people who have been unemployed for 6 months or longer
….. and ….. make it hard for the long term unemployed to find work
discrimination and skill loss
marginally attached
someone who wants a job who hasnt looked for a job within the past year, but who isnt counted as unemployed because they are not currently searching for work
type of discouraged worker
closest discouraged worker to being back in labor force
underemployed
someone who has some work but wants more hours or someone whose job isnt adequately using their skills
involuntarily part time
someone who wants full time work and is working part time because they have not found a full time job
alternative measures of unemployment tend to follow
movements in unemployment
ex) if unemployment goes up, involuntary part time work will go up
on a graph of labor demand and labor supply
equilibrium occurs where everyone who wants to work is hired
frictional unemployment
due to the time it takes for employees to search for workers and workers to search for jobs
when there are efficient methods for job searches, frictional unemployment is lower
structural unemployment
unemployment that occurs because wages do not fall do bring L(s) and L (d) into equilibrium
cyclical unemployment
due to temporary down turns in the economy
frictional and structural unemployment explain why
equilibrium rate is never below zero
3 factors of frictional unemployment
1) efficiency of resources employers and workers use to find eachother
2) alignment of skills workers have and skills employers desire
3) employment insurance and other income support during unemployment
structural unemployment occurs when
prevailing market wage is stuck above equilibrium wage
efficiency wage (cause of structural unemployment)
higher wage paid to encourage greater worker productivity
makes it unprofitable for employers to lower wages
can lower total labor costs
create unemployment
institutions (cause of structural unemployment)
unions keep wages high for some workers
job protection regulations make it hard to fire workers
min wage keeps wages from following below set wage
economic costs of unemployment
unemployed often end up with less opportunities and lower wages
permanent unemployment can arise from periods of high unemployment
high unemployment means less gov tax revenue but more spending
hysteresis
period of high unemployment leads to higher equilibrium unemployment rate
social costs of unemployment
isolating and painful
long term unemployment causes worse outcomes
children whose parents experience unemployment suffer
2 ways to build capital stock
1) saving and investment
2) foreign investment
capital by itself has diminishing returns. if you add more and more capital growth in output will get
smaller and smaller
solow model
preserving/growing capital stock seems to be key component of economic growth
how societies create economic growth
1) accumulate physical capital/develop human capital
2) develop new ideas and tech
retired people are not
unemployed
discouraged workers
could work if offered a job, but not actively searching for a job due to discouragement with labor market
what two surveys are used in unemployment situation
household and establishment
there is always a …… in the labor market
surplus
high unemployment =
loose labor market
benefits businesses, not workers
low unemployment =
tight labor market
benefits workers
unemployment insurance
makes frictional unemployment last longer, but for good reason. we want people to find the right job, not the first one
skill mismatch
skills become less valuable to firms, employees cant agree on right wage
idea behind efficiency wages
you pay a worker a little more and they make you a lot more money
efficiency wages cause
price floor effect
increased price of labor and increased quantity of labor supplied
minimum wage creates
price floor setting a min price for selling labor
persistent surplus is created, creating persistent unemployment
economists are skeptical of the idea that min wage causes
structural unemployment
natural rate of unemployment
typical rate of unemployment when economy is growing normally
comprised of structural and frictional unemployment
inflation
generalized rise in overall level of price
inflation rate definition
annual percent increase in average price level
inflation rate equation
100* p(this)-p(last)/ p(last)
consumer price index
average price consumers pay over time for a representative basket of goods
how much of budget the average person spends on all goods and services they buy
cpi formula
CPI= (cost of basket in given year / cost of basket in base year)*100
then, to calculate inflation, use 100 as the base year and calculate inflation using growth formula
use cpi to think about how
value of a dollar has changed
deflation
generalized fall in overall price level
what does the cpi not tell us?
1) only measures price changes for existing goods
2) quality improvements hide price increases
3) people change their basket when price rises
indexing
adjusting wage, ss, taxes, ect, to compensate for inflation
gdp deflator
price index that includes everything economy produces
can be used to calculate real gdp between years
how to calculate gdp deflator:
1) pick base year
2) use prices from base year to calculate real gdp in a year
3) take nominal gdp in that other year, divide by real gdp from step 2
4) multiply by 100
gdp deflator =
(nGDP/rGDP)*100
money illusion
mistaken tendency to focus on nominal dollar amounts instead of inflation adjusted amounts
money
asset regularly used in transactions
money functions (3)
medium of exchange
unit of account (relative value)
store of value (savings/retirement)
when inflation is high
money’s ability to complete its three functions decreases
menu cost
marginal cost of adjusting prices
reprinting menus for price adjustments
shoe leather cost
costs incurred to avoid holding cash
hyperinflation
excess inflation, no trust in money
business cycle
short term fluctuation in economic activity
peak
high point in economic activity
recession
a period of falling economic activity
decrease in RGDP and rise in unemployment
trough
low point in economic activity
expansion
a period of rising economic activity
potential output
level of output that occurs when all resources are fully employed
unemployment at natural rate
economy at healthy limit
no inputs/ raw resources wasted
capital and labor being used productively
output gap (formula)
actual output-potential output / potential output
*100
positive output gap
producing more than potential
some resources over used
negative output gap
economy producing less than potential
resources being under used
boom
economy operating above sustainable potential
bust
economy operating below sustainable potential
recessions happen when
boom turns into bust
recessions are ….
expansions are…
short and sharp
long and gradual
persistence
economic conditions today are closely related to economic conditions in near future
economic variables …..
rise and fall together
ex) gdp falls, employment also falls
leading indicator
predicts future path of economy
lagging indicator
variables that tend to follow business cycle with a delay
example of leading indicator
confidence indicators, stocks
example of lagging indicators
gdp, cpi, unemployment
financial sector
creates liquidity, reallocates resources and spreads risk
banks
take deposits and turn them into loans
turn money in the future into money in the present
interest rate
price bank is charging for this service
deposit =
paid interest
borrow
charged interest
5 functions of banks
1) pool savings
2) spread risk
3) solve info problems
4) provide payment services
5) banks create long term loans with short term deposits
bank run
many people try to withdraw savings at the same time
consequences of bank runs
threatens stability of financial system, very contagious
bond
an IOU, promising to pay back a loan or debt with interests over time to whoever holds the bond
usually tradable
get loan payment + interest payment
bond market (4 functions)
1)creates liquidity
2)moves funds from savers to borrowers
3) spreads risk
4) funds gov debt
stocks
partial ownership of a business, entitling the owner to a share of the companies future profits as well as a say in how the company is run
dividends
share of companies profits paid directly to shareholders
functions of stock market
1) channel money from savers to investors
2) spread risk by bringing in more investors
3) reallocates control of a company
one big risk of financial sector
creates interdependence and negative outcomes can spread outside of sector
fundamental value of an asset
present value of future profits, payments, or other cash flows that a financial asset entitles you to earn
efficient markets hypothesis
at any point in time, prices reflect publicly available information about the fundamental value of an asset
says anything predictable is already incorporated into price
reason why it is tough to predict how stocks will move better than the overall market itself
x axis of AD AS model
quantity of output (real gdp)
y axis of AD AS model
price level (gdp deflator)
aggregate demand curve
summarizes purchasing plans of all buyers throughout the economy. shows relationship between average price level and quantity of output that all buyers plan to purchase.
why is the AD curve down sloping?
because higher prices cause the Fed to raise interest rates, raising the opportunity cost of spending money now instead of saving it
a lower average price level means buyers will demand a larger quantity of output
aggregate supply curve
summarizes production plans of all suppliers throughout the economy. shows the relationship between average price level and quantity of output that suppliers collectively produce.
why is the AS curve upward sloping?
Some prices and wages are “sticky,” meaning they adjust slowly, so higher demand leads firms to produce more at higher prices in the short run.
Aggregate expenditure
total amount of goods and services that people want to buy across the whole economy
aggregate expenditure is the sum of
consumption, planned investment, gov purchases, net exports
planned investment excludes
unplanned changes in inventories
a higher price level leads to
a higher inflation rate
higher inflation causes the fed to
raise real interest rate
higher real interest rate leads to ……. aggregate expenditure
lower
changes in price level lead to ……. the AD curve
movements along
what shifts the AD curve?
1) consumption increases when people feel more prosperous
2) investment increases when it is profitable for business to expand
3) government purchases increase when policymakers decide to spend more on goods and services
4) net exports increase due to global factos
anything that shifts ……. shifts the AD curve
Aggregate expenditure
higher output leads to ….. prices
higher
what shifts the AS curve?
1) higher input prices raise production costs
2) higher import prices reflect international shocks
3) weaker productivity raises production costs
4) depreciating US dollar raises production costs and reduces competition from abroad
AS shifts in response to changes in production costs, caused by shifts in:
1) input prices
2) import prices
3) productivity
4) exchange rate
the fed cuts interest rates in response to (2 things)
low inflation and weak output
what type of change in interest rates does not shift the AD curve
inflation induced (only a movement along the curve)
lower real interest rates are
expansionary
higher real interest rates are
contractionary
fiscal policy
governments use of spending and tax polices to attempt to stabilize the economy
monetary policy
setting interest rates in an effort to influence economic conditions
increase in spending has a …… effect on aggregate expenditure
multiplied
multiplier
measure of how much GDP changes as a result of both the direct and indirect effects flowing from each extra dollar of spending
if output and prices move in the same direction what shifted?
aggregate demand
if output and prices move in opposite directions what shifted?
aggregate supply
in the long run a change in average price level has
no effect on real variables
classical dichotomy
a purely nominal change, like a change in the average price level, wont have any effect on real variables in the long run
LRAS curve
AS curve that applies to the long run when prices have fully adjusted. the economy will return to producing its potential output, so the curve is vertical
VSRAS curve
AS curve that applies to the very short run in which no prices have changed. because prices are basically fixed, this curve is horizontal
sticky prices
prices that adjust sluggishly to changes in market conditions
SRAS curve
AS curve that applies over a period when prices are neither fully fixed nor fully flexible. upward sloping
AS curve is steeper in the
medium run
crowding out effect
government spending that leads to decrease in private sector spending
what shift occurs during stagflation
AS shifts left
what shift occurs when a recession is announced in a week
AD shifts left
AD reflects decision to
buy today instead of tomorrow
fed’s dual mandate
1) promote max sustainable employment (output induced response, shifts AD)
2) maintain stable prices (controlling inflation, movement along AD curve)
if the fed lowers interest rates when price level isnt changing
AD shifts right, expansionary monetary policy
if the fed raises interest rates when price isnt changing
AD shifts left, contractionary monetary policy
leads to less inflationz
zero lower bound
nominal interest rates cannot go below zero
government purchases increase
AD
if the government wants to increase consumption it can
lower taxes or give stimulus
why does the multiplier effect happen?
circular flow model, more payment in one place will spread to another
neutral real interest rate
rate at which real GDP is = to potential GDP so output gap is 0
real interest rate =
nominal interest rate- inflation
federal funds rate (FFR)
nominal interest rate that the fed uses as its primary policy tool. rate banks pay to borrow from one another over night
when inflation is higher the fed makes
interest rates higher
when the economy is above potential the fed
raises interest rates
why 2 % inflation?
1) a little inflation keeps labor market moving
2) 0% inflation runs risk of deflation
3) 2% gives the fed some room. we know the fed cant push nominal interest rate below 0, but with some inflation fed can make real interest rates negative
4) measured inflation might be overstated
taylor rule (fed rule of thumb)
describes how fed sets the interest rate in order to manage its dual mandate
FFR-inflation=
real interest rate
when the output gap is positive, or inflation is too high
the fed raises interest rates
inflation and FFR
when inflation rate is above or below the feds target, it raises the FFF half the difference
reserves
the cash banks need to keep on hand to make payments
fed controls interest rates by influencing banks and their reserves
1) banks earn profit by lending money
2) banks need to avoid bank runs
discount rate
interest rate on loans that the fed offers banks through discount window
if a bank cant get a loan from another bank it can get it from the fed
means that banks will never charge each other more than the discount rate
interest rate on reserves
the interest paid by the Federal Reserve to banks on funds held in reserves
overnight reverse repurchase agreements
the fed sells government bonds overnight and buys them back at a higher price the next day
basically borrowing money overnight and paying it back with interest tomorrow
changing the FFR makes it more or less valuable for banks to make loans
ex) fed raises interest on reserves rate
banks make more money by keeping it in the vault
forward guidance
providing info about future course of monetary policy in order to influence expectations about interest rates
can help lower longer term interest rates
quantitative easing
purchasing large quantities of longer term bonds, in order to lower long term interest rates
makes long term investment easier
lender of last resort
fed will give loans to banks that are about to collapse
can prevent a financial crisis
discretionary spending
spending that the federal government decides on annually
mandatory spending
spending on programs that are set in law
fed wants to set interest rates to keep
GDP as close to potential output as possible
recession
a sustained period of economic decline, characterized by a decrease in real GDP (output) and an increase in unemployment
2 causes of structural unemployment
1) wages increase, and labor supply increases, which causes businesses to not be able to hire everyone who wants to work
2) minimum wage
real interest rate
the interest rate in terms of changes in your purchasing power
the cpi tends to ………state inflation because
over
households change their buying patterns in response to price changes
is the buying and selling of stocks or bonds counted in GDP?
are exports counted in GDP
no
yes
if the two years are right next to eachother and you are looking for growth in RGDP
use average prices
avg p*q
buying a newly build house increases which component of GDP
investment
what shifts LRAS
LRAS is only affected by economic shocks that influence real factors like labor and capital. Potential output has to change for LRAS to shift.
ex) cutting some tax expenditures to fund research at universities increases GDP because of the potential created by the research
ex) tech/ai, human capital, physical capital changes (anything that shocks total productivity)
changes to tarriffs, tax cuts, interest rates alone do not shift
LRAS
if the FFR is below the sum of inflation and neutral real interest rate this means the economy is in a
bust
the interest rate is lower, indicating an attempt to stimulate economy
if the FFR is above the sum of the inflation and neutral real interest rate, this means the economy is in a
boom
interest rate is higher, indicating an attempt to slow the economy
an improvement of the world economy (neighboring gdp increase) shifts what curve
AD
change in currency rates will shift
both AD and AS
they will shift in opposite directions
ex) if the dollar depreciates relative to the yen: AD shifts right and AS shifts left
currency that it is “in”
numerator
currency we’re in the market for
denominator
what do you use to find RGDP when the years are right next to eachother!!!!!!!!!
average price *q
when the dollar is down, exports are
up
when the dollar is up, exports are
down
what shift occurs?
tsunami wipes out US factories
LRAS and SRAS shift left
demand will not shift because a change at the factories doesn’t change how much you want the product, but a movement along the demand curve will happen because of the change in price level
where does the business cycle start on a graph
the peak
how does the fed actually set the FFR? (4 steps)
1) pays interest to banks on reserves
2) borrows money overnight from financial institutions
3) lends directly through discount window
4) buys and sells government bonds
buying government bonds is what type of policy
expansionary monetary policy
increases liquidity and lowers interest rate, therefore encouraging borrowing
risks associated with being lender of last resort
can lose money
can lead borrowers to take bigger risks
what is the majority of government spending
mostly federal, mostly on social insurance programs
how has government spending changed over time
has expanded overtime, spending has grown especially on social insurance programs
where does the majority of gov revenue come from
payroll and income taxes
income taxes
taxes collected on all income, regardless of source
payroll taxes
taxes on earned income
earned income
wages from an employer or net earnings from self employment
progressive tax
tax where those with more income are paying a higher share of income in taxes
income taxes are progressive
marginal tax rate
tax rate you pay if you earn another dollar
taxable income
income you pay taxes on
tax expenditure
special deductions, exemptions, or credits that lower your tax obligations to encourage certain behavior
hidden gov spending
fiscal policy is most effective when it is
timely, targeted, temporary
1) gets ahead of problems and acts quickly
2) targets those who need the most help, unlike monetary policy
3) extra spending is no longer necessary after a certain point
expansionary fiscal policy
increase in gov spending, decrease in taxes
contractionary fiscal policy
decrease in gov spending, increase in taxes
budget deficit
spending greater than revenue
4 facts about gov spending
1) federal gov typically runs a deficit
2) persistent large budget deficits are a relatively recent thing
3) wars and pandemics require sudden surge of spending that results in budget deficits
4) business cycles create budget deficit cycles
why should the gov run a deficit
1) creates long term benefits that we shouldnt have to pay for right away
2) prompts gdp growth that can be used to pay the debt off
3) necessary surge spending (like in a pandemic) means that it is an inefficient time to collect the necessary funds all at once. smooth taxes between years reduce possible economic distortions
debt
total amount of money owed
running a deficit is a way to get into debt
reasons to worry about gov debt
slow growth
constrains the future in terms of fiscal choices
risks crisis of confidence
debt crisis becomes more likely
reasons not to worry about gov debt
most debt is owned by americans
future generations can help pay debt
wouldnt take a big adjustment to repay the debt
gov doesnt actually have to repay the debt
gov has options you dont
nominal exchange rate
price of a currency in terms of another countries currency
nominal exchange rate
price of x in y
y/x
in/for
can be rearranged to find other values
appreciation
when price of a currency rises
depreciation
price of a currency falls
if the dollar depreciates, the other currency
appreciates
if the dollar depreciates
imports:
exports:
decrease
increase
if the dollar appreciates
imports:
exports:
increase
decrease
if the (import/export) is increasing, it is
cheaper
what goes on the x axis in the market for dollars in euros
q $
what goes on the y axis in the market for dollars in euros
p $ in euros
what does demand reflect in a currency market
foreigners buying exports or investing in the US
why does demand slope down in a currency exchange market
when the price of a dollar is low, it take fewer euros to buy
what does supply reflect in a currency exchange market
Americans buying imports and investing abroad
why does supply slope up in a currency market
when the price of a dollar is high you get a lot of euros in exchange for your dollar
what shifts demand in a currency market
exports
increased exports will means increased demand for the currency
financial inflows
increased inflow means increased demand for the currency
what shifts supply in a currency market
imports
increased imports means increased supply
financial outflows
increased outflow means increased supply
when demand for the currency increases, the currency exchange rate
increases
when supply of the currency increases, the currency exchange rate
decreases
real exchange rate
ratio of domestic to foreign prices, measured in the same currency
formula for real exchange rate (expanded)
domestic price (in dollars) /
(foreign price (in foreign currency)/ nominal exchange rate)
what does the real exchange rate measure
uncompetitiveness of US products
high real exchange rate means
RER>1
uncompetitive
imports>exports
low real exchange rate means
competitive
imports<exports
who benefits from a higher than expected inflation rate
borrowers
buying a bond
lending
selling a bond
borrowing
coupon payment
annual interest paid on a bond
what shift occurs
sudden increase in oil prices
SRAS shifts left, but will eventually return to original LRAS output level as input prices eventually stabilize
increasing interest rate on reserves pushes up the
FFR. increasing this rate means that banks want to keep their money in the reserve so they are going to charge more to lend it out
