ECON 2200 Chapter Notes - Chapter 22: Loanable Funds, Bank Reserves, Beck

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9 Feb 2017
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The Roaring Twenties (Chapter 22)
I. Introduction
A. A Brief Overview
1920s decade is generally considered to have been a period of growth & prosperity:
o Real GNP Growth Rate (1920-29) = 4.2 % per year (on average)
o Real GNP Per Capita Growth Rate (1920-29) = 2.7 % per year (on average)
Growth rates look really good (not a huge difference between GDP and GNP)
However, the decade started and ended with significant recessions:
o Short, but intense recession of 1920-21 just as WWI ends (V shaped; fall
quickly but bounce back rather quickly too)
o Crash of 1929 & The Great Depression long, deep recession with slow recovery
B. While economists disagree on causes of Great Depression, the 1920s may hold clues to
understanding the 1930s. As you study the 1920s, look for signs of underlying “structural
weaknesses” that may help explain the Great Depression.
C. Recall (from Econ 2105):
Aggregate Demand (at a given price level) (demand for all of the stuff; demand for GDP)
= Aggregate Expenditures (AE)
AE = C + I + G + (EX - IM) (EX IM) = net exports
AE = consumer + business investment in capital (stuff) + government spending + (EX IM)
Purchases of newly constructed homes fall under the “I” category not “C” because it looks
more like a building (capital) than something a consumer would purchase
3 “traditional” monetary policy tools of the Federal Reserve (Consider how each policy
tool affects the monetary base and bank reserves.)
1. The Discount Rate: interest rate the Fed charges commercial banks for
short-term (“overnight”) loans
If Fed ↓ DR: banks become less conservative about reserve holdings; feel
more comfortable lending out money because its not going to be so
expensive if you run a little short > increase loans, decrease interest rates,
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