econ_100B-19 - ECONOMICS 100B Professor Steven Wood Lecture...

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ECONOMICS 100B Professor Steven Wood 10/30/08 Lecture 19 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. *Note: Reference to Professor Wood’s Power Point Slides today will be noted as (19-1), for “Power Point #19: Government Spending and its Financing Part 2, Slide #1.” LECTURE Today, we’re back to government spending. Yesterday, the Federal Reserve reduced the federal funds rate to 1%, taking it back to the lowest rate that I’ve seen since I was born, which was a long time ago. Clearly when the central bank is reducing interest rate, this is because they’re very concerned that the economy is heading into a deep recession. Given the fact that we’ve seen these interest rates move so dramatically, the shocks that we’ve seen in the economy are probably from the market for goods and services. There is even a rumor that the Fed will even lower this rate to 0%. I don’t think they’ll go that far, but one of the things to keep in mind is that if the Fed does push it to zero, they can’t, so they’ll have to do something else (nominal interest rates can’t go to zero). Early today we got a report on how the economy grew in the third quarter this year. Well it didn’t; it actually shrank. The current estimate is that the growth rate in the 4 th quarter will be -3 or -4%. Consumer spending was down 3.1%. This is very substantial. Remember that consumer spending is about 70% of the economy. We haven’t had this negative shrink since 1991. The first thing that we want to realize is that government outlays, or government spending, is actually composed of three things. The first is government purchases (G). These are purchases of goods and purchases, or the part that directly affects economic activity. We also have transfer payments (TR) and net interest payment (INT). Both of these may affect economic activity, but not directly. When we think about the kinds of things the government buys, we can make a distinction between government consumption services (things they buy and use up in the same time period) and government investment purchases (things they buy and wait for returns). Most of government purchases are taken over by payroll for anyone in the public services – firemen, policemen, park rangers, etc. But about 1/6 of government purchases include investments such as buying trucks, vehicles, office equipment, building offices, etc in order to support government plans that take place. So not a lot of what we do by government is not what we would consider an investment activity. TRs are expenditures for which the government
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This note was uploaded on 11/15/2008 for the course ECON 100B taught by Professor Wood during the Fall '08 term at Berkeley.

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econ_100B-19 - ECONOMICS 100B Professor Steven Wood Lecture...

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