econ notes - Demand management Fiscal policy government...

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Demand management Fiscal policy - government spending and tax policy Less government spending and more taxes moves it in. Monetary policy Government can effect the demand more then supply We could use demand to control the private sector Feds play with the interest rates Interest rises it moves the aggregate demand outwards L=labor input Y/L is labor productivity Potential GDP-The leve of GDP that would happen is we were operating at full employment X=W(Z) –individual growth rates that you add together to get the growth rate of x Growth rate of labor input is mainly determined by demographics In the post war era what is the growth rate of potential GDP=about 3 In recent years it’s been higher Should the policy makers make the economy grow as fast as possible=problem is Exhausting resources and pollution Increase the growth rate of potential GDP Policy goals Growth Unemployment Unemployment Unemployment can go as low as zero If growth is faster then growth potential then unemployment tends to fall Gy>G(potential) then unemployment rises If people are not working then resources are not being produced. We are forced to take care of the unemployed Teenagers, blue collar, education levels have high unemployment rates Take out less then 16, incarcerated, and the army-these are the people that can potentially be in the labor force Unemployment rate =number of unemployed/ labor force Structural unemployment-changes the demand for skills Frictional unemployment-people changes a lot Cyclical unemployment-results in a drop of aggregate demand Full employment-means that cyclical unemployment equals zero, not unemployment is zero but cyclical Two major institutions of law that effect unemployment Minimal wage-tend to increase unemployment Unemployment insurance-claims go up with the economy does worse, make them spend more to make the economy a little less bad. July 2007 unemployment 4.6$ White 4.2
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Men 3.8 Women 3.6 Teenagers 13.7 White 4.3 Asian 3.0 Hispanic 6 percent CPI-consumer price index- Student price index relates to students consumption Everything has a quantity with an average price CPI 2004= Cost of the base baskets in 2004 Cost of the bike ear basket in bike year CPI in 1983 Inflation 2003=CPI(2003)-CPI(2002)/CPI(2002) W(2006)/P(2006) x100 The process of dividing by the wage is deflating Anything nominal can become real by dividing by the price index Nominal GDP can go up if the price level or price quantity goes up. Price times quantity Real GDP is output GDP deflation=nominal GDP/Real GDP (100) GDP includes more then consumer including government, exports, there is also investments done by businesses Not inflation we’re worried about but more about the w/p Nominal interest rate- Real interest rate is almost equal to the expected inflation The borrower is at an advantage because they might not have to pay back as much because of the price change.
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