macro - ad! BUSINESS 0 OVERVIEW ' Imnomiu: ['hc «My .11'...

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Unformatted text preview: ad! BUSINESS 0 OVERVIEW ' Imnomiu: ['hc «My .11' ho“ scam: rcxouruca arc . -\.-.‘.:‘I .IIIZI‘I'IL' unmpuung Lm‘x ' hm Imnumiu quslit n5 Include: '.\ -- r ‘ pruduccd'.‘ ~ I‘. prodm‘cd ‘ .\ -. gun \\ |I.I: I) produced? - I'RUIII ( 'I'IO\ POSSIBILITY FRONTIER: .:".L'II'.I‘.I\L‘ unI‘.:h:II.ILIoII.\ uI' I'IIIIII gumln nml or Id be produced In :1 ngII IIIIIc pcnm‘l Whic .md IIIIIIIL‘iI I'L‘M‘ILII'L‘CR and Icchnnlug} I:'I.l‘. .I'IJ. .qu IIP‘fll‘I'ELIIIII} L'uxl: Ublaining moI'c pruduclmn 14mm: IL‘quII'L‘) LI Imluclmn ||1IIIL’PI'ULILICIIIIIIIIIIhl :".\- ".':JI‘.1'._‘- I II! on: or more otlIcr gmuln. IIPPUI'ILIIIII} "-.".__' mum of .I good requires going up cqu' \‘(lwl IIIULIIh IIIIII ::'IL'I'L“IhIII.'=I :'__\" IIIIIU'JIII.‘ o! 15.: nllcrnulnc good. - Insidc I'rIInlit-r: l'numpluyud rcxnurcm .'...'|.':I-.'\I - I\panding l'runlit'r: IIIL'FL';I:\C:\ in remuu'cn and _-.L.I; ,Idmnuua - .."..IIIIIII!\ I‘TI‘lIIICC‘i only I goods [XX] Point; on :-.c I \IHIDI rcnrcwnt \III-I-L'rt‘lll cuIIII'IIII‘IIIuIIs _'.\II\I‘\ IIIIcn :III resources are used II‘uII ‘ 1‘ "nun: uI'I'I‘x'LIurL‘cH II'IIIL‘ allocut'nn IN inside II'IL‘ ‘ m-nc lx‘uMiI‘CU-x iII'L‘ nol med nl' III-ed ;."-. £|1|I_\ SOGGV I l D 103 200 300 Good X l\pIanalion: IIIlr- an'axc pruduruun PLIBHhIIIIICB I.i\| of IIIuruumIg opportunity 0le - Y Liqu: u umc mth 1!qu ccnnum} i» tinr-c ul' X :IIId Icn III'\' .-\I puml -\. II‘IL' ' . I‘m-(mo |~' :LIIIh HIV and zero 3. \I I'Iull'll ."'T‘ .-I \ .II': r:qu prIIIIUCL‘II 'I'IILIII IIIh. I unit nf\ u uiwn up In product lIh: nu\l IEIII I1I1\\\'\I.'.’. Y -:‘ \'..'~‘|‘~ rI'IIIn I3 Io III IIICIIIIIIIg 3 units of‘I is gIn-n up Ipoinl ('1 I-'III;I||_\ IU produce JII kitILIIIIUIIEII u \. III units on has Io he giwn up lpuinl ll- ' {III‘I'L‘JINII1]1II'CC\pCII>I\CIl'lpl'ULIllCL‘IIIE _ '~ -' \ - Htl“ ( IIUH'IIK \Rlfi .\I.\l)l€: \Iarkut \lrchanhm: \IIII'LL-i LIL‘IL‘I'IIIIIIL‘II prluh - _ __ Ina“ .IIIII {Hm-Iago“ and onncrs ;I.IIU\'&IIC '..I!\'\' .uII;I:II;I1.=c III' IIIghuxt IIIL‘IIIL'I:II'_\ l nmrnand u'onum}: (cmml IIIIIhant} .IIIlIL'JIL'h cw gunk. ‘.I.\:I: I..l‘IIk‘III_\ [|I;I[ usea holil murkul IIIIII I"-"I\|I'kL‘l ~:__'II.I':.~ 10 .Illocutc gnu-xix .ImI Thu _'.I'\'- “Id: .I-x :I.I1Iu‘.I.I| prIIIIIIquII .IIILI IIIL' -\IaI:rnr.-I:IInIIn1iv-I: "‘IIIII_\' UI' ucunumu‘ ' \Iu'rurcunumit‘k: I'itc ~11ILI_\ ul' IIIL‘ hchzuinl' nl' ‘-'|‘\.131L‘I'~ .IIIII prmluwrx uprruling in IIIL‘ . :t'._:r...-c'.~ III'II'IL' cuIIuIIII). HHRLD‘S I‘H QUICK REFERENCE GUIDE OECONOMICS SUPPLY AND DEMAND DEMAND ° Demand (‘uru‘ (Scheduli- : -'\ (one IIIII'IIL‘I \IInuIng [IIc L|UIIIIIIIIL‘.H III-\I good .I CUIIMIIIIL‘I I» III 1nd :IhI-c In hu_\ 1!] :IIIL‘i IIEIIIU.‘ [‘I'Ii‘L‘k guru L'III1.\1.I!II lastca. III\'HIIIL‘.\. I'C|;III:II pllt'c'~_ .‘II‘IEI IIIIITII‘EI' III'IIIIyn'x. 0 Lou of Demand: Incrmc in Imus II‘I (sunk outrun»: III quonlil} IQI (Ik'IIIIIIHIk'LI 0 (‘hange In demand: (11.!!ch III l.I~Ic~._ |1|'|\'I.' nl' I..'I.II-.‘d gnudx. |!I\'l'IIIIl.‘. IIIL'ICHH: In IIIIIIII‘L‘I' III' hulu x: .Illch pIJIIIIL‘II (I'III‘flllIIFIIIDII .‘II .III prin‘x. aIIIIIiII-g L':I|'\L' In I'IgIII IIIIL'I'L‘IINL‘I o:' IcII “ICCI'L'II‘CI - (‘hangu in quanliu III‘Inandod: I .||I~L'li II} .I\\ II III'Icu chungu :Ind |'L'\'.III.\ III IIIIHL‘IIIL‘III :IIIIIIy L'lll"\ c * ReIaII-d pricus: IIIx'IlIlIi.‘ plow nr' L'IIIIIpL-HIcnh u.- .\LII¥.\I|1LI[L‘.\ Including I'uluI'c L‘IIII.\IIIIIpIIIIII SUPPLY ' Suppl} Cunt: .\ l'Iil'H.‘ [IllhIL'I hIIiIulflg II“ ll..|nlllic\ .II'.I good J seller I.‘\ “IIIIIIgnIIdIIhIczusL-II.II:II1urII.I1I\L-|1I‘iLu>- at .I 0nun curd l‘I‘l'IFUtILIk'IIlIII dclcrmmu! I1_\ mmlunt IIII'ILII {III-Lu. lcuiIIIIIchg}. .IIILI number III‘M‘IIL‘I'II. - Lau ol'fiuppl}: IIICFIJIISC III pI'I -; II’I L'LILI‘w'm I’.1t'|'L'.I\L' In I.|II'III'III[_\ IQI xuppllcd. '- (‘hangl‘ in suppl): (hang-c III (ml of ill'ULILIL'IIlIlI. t:c|1nnIu;_-_\_ pro-c uI‘ IIIIIK‘I' produced yuuda'. numlwr 0: ncllcm alllcn plunncil «ulcn :11 LIII priucn. .xIIII'I to rlghl I IIIL‘I'CLHCI or IL‘I'I Idecrcunm. ° Change in quantil) Isupplied: lath-rd In mm pm: change {IIILI I'cxulh III :Ilmclncnl ilIIIIIL; mm c MARKET EQUILIBRIUM - I~Tqui ium: \\ IIcn pro-c p I: ntubhshcd “Ilk‘l'k‘ quIIIIIII} dcmumIcIi Il‘vl qunnnty \uppII-ed IQoI. .LE L‘LII'\'L‘ SUPPI Y ' Pmperlit-HII' Fquilihrimn: PG ' ' I EQ'J'IDW'“ ‘.|’ 'I'... Nill'|‘IIl:\ ' 3. I" 'I'o h-IIUI' DEMAND 1. I’—I’L.. .xluIIIx‘ ‘ Ouanllty ' I’rict- ('unlruls: O 09 |.< 'IcIII'rI-g I'chuu cquIIIIII'IIIIII 3 Hour .Ihmu L'L|'IIIIII1:'I1|[II Ihdt‘l'Cl \JIL‘hI -('hanfics [n Equilibrium: I'iltllIlI‘I'lLlIII III'iI‘c uill xlIUI'III-g; LIIId IIiIu'I-I In.“ Iw‘. wLII'DIII‘ IIIIII uthIIIIy ulnIIIgc \\I‘.I..‘|‘.L'\CI' Ihc huppI} or LIL‘IIIJIIRI \‘III'\I.' .\IIIII\ MEASURING ECONOMIC AGGREGATES MEASURES OF OUTPUTI‘INCOME - (imu damn-slit“ product ltiIJI'I: \';I|-.u- of pllhIllL'IIUI‘. \\ i1|1In iI L'IIIIIII:'_\'.- houndarm I.\alue -\dded ('uncupt \;I|IIL‘ III' IIILIIL‘I'IIIL Inpuin ~IImIIIcLI Jun.“ I'II'I‘Ih 3. Inuunn- \Ielhud - IIIIL‘i'LNI - JII|II\II'II\.‘I'I‘.\ .Lliqwndilun: Mt‘llllld ISIIIII [III Inpcm'IIILII'Cw Im I'iI1.lI l’I'Iqu-c('.III~.IIII|\IIIII1I('I - (irvfi I’I'IIuIc I)lIIIII',‘\ll\' II:\ u-iII‘IIUII I II - (IIHL‘II'II'IIL‘II'. I’uu'lIIm-I I(i|- | \poI'hIXI IIIIIIIII'IHI\I| II -|-[.-\‘\II ' Rt-aIGlIP III)!” PIIL'L' IIILII.'\ IICIIaIcII II} IIII.‘|'II'IL'L' IIIIIL'\ I Not Domestic Product I\|)I’I (I'DI‘ Ic~~. L'.I|3|I\II (nthllIlleUIl :IIII‘IIK'JIIL‘L‘ - Vatinnal InL'anH:1\IJ - \lIIh-IILIIL‘x - Personal Income I Pl: curmngs - “IL-LII xv;- - Disponahlc Income IDII - GDP Shorlcmnings: I.I'-':IcInI'~' or \.II'iIIi\lc.\ IIIII |III.".I:\I.II'\‘I.II .I. I. IIIIL‘I'y'IJIIIIII CCUIIUI'II} I1. IITIIII'LHL'II qu'dIII) c. \InI'C iumlrv. ‘IIIIIIILI‘gII IIIIEII)II:-__‘ :L‘ucl' IIIJLIIN III mII'k. L‘.III Il.'.I(I In gruum' Pl'lILIIIk'IH I‘._\ I i.'L-I'IIII'II gnmix JIIItI I‘m-\Icc» mnII'Ihutc III ]l\‘1':\I'II'l.I.I uI' prupcm I!c-lru.:linIIIL"_.' llIt'l‘IIlII.EEIIIilt't'lI. gum ctr I \.IILl-.‘ III |‘|:'IHILI\.'II|II‘. IL‘\\ \\Ll_'_'L'\‘IIIII h.lI'.||'|L'\ - run: - pI'nIIIa goods LIIIlI ~cr\ :cml \IJI’- III‘III'L‘L: HIIflIle. Luca IcI.IIIIuI ILIIIxIL‘I II;I_\:IIL‘III~ I’I - IJCI'xIIIIJI |;I\c.~ \l - IuII'IMIrulu Lucy - '|I_\ mun] - MEASURING PRICE LEVEL 0 Pri r lndm: -\\cr: Icwl III Imam I'L‘ Ilk- 'n .I Imm‘ .Ilm‘ pcIII'ILI i IN. III'.I:'I\I:III\;I.~III:1 lIE\ 1' [u Incldgu Inn: ul‘gmuk I'cporicv'. .I- u JIuI'L‘:II1.Igc uI'Imc lIcI'IIIII \mI ' (EDP PRICE “DEV: -\ IIIcuqu'u ur'cIIJIIgw ||' IIIL‘ In cr - ( umumcr Price Indm IFPII: .\ :IIcumn: u: 1I‘.C murch pro-c oI'III'EuII cumumur goods and \L‘Iw tum - Producer Price Indm IPI’II: .\ 1:1L‘:I~I.:'u .-: II: IIIc I1\L’I _"‘.I h- urudc IIIJIL’I'I‘IIHI II‘.l-cI'IIchI.ai-c you”. I.l‘.l-IIL‘LI _-_‘II.IL':>I - ('(n‘l UI I.i\in:: \tliu‘plnlenl [(‘UIAI: \JIIIIII‘IIIL .Ixi:I.~.'.IIIL'IIt~ ul' Inmm; to thy I'ulu III' II‘. __-uI‘ MEASURING INFLATION - Inflation: i -IIII.IIIIIII;: 'II.|"..‘.I\L' I hm L'.\ .II :u.u|~ '.I:‘..I \L‘I'n IL';\ I". L':' 11111: ’c pros-c LII' .lII good?- .IIII| Nk'l \ lL'L‘“ I.'.I1‘_.'I.‘\ III age |'|I'IL\‘ ul';uuuin hu- IlltIll\CI\ t::‘.|u\ln l'IIIl'L'.\ ul' __'.n~I'.~ .IIIlI “run-a IIIcgJIIlIxu inIIIIIIun I'.I1L‘I U\ L‘I' III'IIK' ' Iii~i nation: LIL-III; IIIIIIIIIuII :'.Ilc \olu IEI.II pI'Iccr .II'I.‘ ~.III! IIIl'IL'II‘n L‘ ‘ Inflation rule: iwmccn IIIIIL‘ purl-Id qu' and Hum I) '10qu ton ;~ ' ' 'I'_\ peh' III' Inflation I \LIIIIII} xII‘Ic IIIIIIEIII‘I' ll. “age—push i1 (ml-[lush lIt'IL'c IIIL'I'mw I. Demand-pull inflation: \II III. |\'.l\'\’ III III-c pm 1’ cwl IIIIIIIIIch In C\L‘C~I.~I\L‘ .Ig oupc .IIL'I'L‘EISL’ Icudn III pro-c mgr-saw IIuII-IIIImI' L'I‘Alh EcIIII~ :u 'HLI'L‘du‘ II‘. cunt-c demand. - MuLI'u ('nnxcquuogu .a: Il'II.IIIII\'I;I;IIcLl'I IlIfldTll‘lI' I. l 11L‘..'l'l.'lI'.I‘.\ 2. HIWCL'LIIHILLIII 3. \lHI-I‘II'IIIIIIL‘III L' Inn-«monk MEASURING UNEMPLOYMENT - Labor Force: l I]l|‘Il‘_\\‘tI III'l IIcmrIIII) L‘II I‘Lnlplowd: \\III'I~II1_L' .IrhI Iml Inuihnyfi- I'ur' mark lnumpluwd: 3 :‘cqu:r'cIII-cnh :u I1: Li! ‘gnrycd .u IIIIcIIIPIquI |. Ito: '\\l|:'I'\III'_.'. I able In ImI'L. ‘ Ioqu. I'III' qu'L l\l-.\II’! l I‘I'\II-\I I'I:c 'I'} pu of l' I'll.‘ mplm Im-ut: | Seasonal: 1'I. .IL'IIL'LIIIlII'JI ~L';i\\II'~._ tum'ixl >CLI~I‘II\. u‘lquI IWIL-J'm. J. 3. I-rlclional: I .‘Ic:11|\II-_\III»,'I‘.I ,l\ [\‘opl; |II1‘\ c Ik'lucu: 'nlh .II IIIII‘ li'IL‘ ..1hI~I IIIIIIRL'I : “i lt‘lul'ilI: \\“II'x\‘|'\ E.IIII IIII 5‘} \IL‘LIIII.I‘.;_I |I‘:.I'.I\III.'\ III' III (ICL'IIIIIIILJ .. -I ('_\I:lital: LnumpIIomcm do; In _-;.-I-_u:.-.I k'LIIIII‘HIIh' __.n§ranoy-m:-:nl Ema :r—IIJOI force I: 100 Ipln} m1 II.I: 11cm .‘CII |‘\'I"-‘LI\ c‘lnlh I}: ’\\ 'u‘“ I‘I\\IIII.'\.'\'II‘.'\' :IL‘CL'N\I|II'. ‘ \lacro I:Iill\l'l|lll:llt't'\ III out-IIIIIIII_\IIII.-m: I ml I. LI: {)LLIII-n I'L‘IIHL'LN (I'III’ h} I - SI’I'I'IAI. ( [..-\S\'Iz.\' (II- WORK] Rh' 1 l'ndcrulllpluy-d: I’cupI-c \._".‘L|I‘__' II:" “NE-MW: ‘ unpluycd .Il |~~11> Ix-qu :IIL'EI :IIIL‘IIIi‘III} {in _‘ Lald-IIIT IDIII\I(II.1III\ “ill! promiw III In' I't’IIII't‘dI \lII |.uI|>.:I‘.'| III: [‘011HIJ‘II3IEJN .uI (\k't'I'IIII'I‘. In E- |}iwuura§.:I.-(I \\1II'I\I.'I'\: \.~; I‘CLJ‘I‘IC not IIIl=:\:II_'_' I.-:' \\-I:'I‘ .' .Ixcx I.'- :\- L'IIIL': u :‘ -' [an I". II]; ITII‘C a" . \IIIUIIII‘IO} IIIx‘lil I L':II|)III_\III.:III unIL mus “In: .-! "IIJI‘IPIURJII 'I.II‘l': III:\I.' .\II I.II‘I‘I :1';II Ixcl II'II‘I l|\ g\ I‘ICI'IIIIIIUII .\|II:rIIIII'In:.I_ period: III' uttIIIIInIiI.‘ urlmth and cunll'aclinn. \ sinulr hUsim-n r) (In: unultl haw thw: qur parts: GDP | II'm --h 2 RL‘L'IH \'|_\ .I. I’CIIL -II RL‘L'L'vJIII] '.|:L' ou‘mgu Inc} 01' ° Deflation: l n:I‘.I:I;I;II-:: lIL'l mm: In [IN uu‘mgc :mcI IsI' VIN-[EIde vmadov AGGREGATE SPENDING KEYNESIAN APPROACH Circular Flow equilibrium: Spending — Output to meet Demand " Income CONSUMPTION (C) E SAVINGSIS) ' CONSUMPTION: t l-Iquatioit: (' = a - Yt-Il’t'tYI: where :i is consumption at [I income. [also called autonomous consumptionl and Y is personal disposable income \Iarginal Propensity to L'oitstinte [MPH [change in {'i [change in Y: fraction of an extra dollar of iitcuiite that is spent. ..-\\erage Propensit} to ('tinsunie t:’\P(‘] - (H Y fraction ol'an average dollar that is spent - SAVINGS: SatingstSi — lncontetY i — ('onsutnptionlt'i I.quléliltlni S — -a * MPSt‘t'I 2. Marginal l'ropensit)‘ to Save I MPSI tcliungc in 31 [change in ‘i'i = fraction ofan etira dollar ofincome that is saved. .‘s_.~\vcragc Propeiisit} to Save [APSI S Y of an average dollar that is saved. ' “Pf "' .‘II’S = I I .-\P(‘ +.-\PS = I GROSS PRIVATE DOMESTIC INVESTMENT (II Ifspeiidittires on or production of new plant and equipment icapitalt in :t given time period. plus changes iti business inventories. ' .-\l‘fer.-Ied by Expectations & interest rates [e.g. Crash makes many-- fearful about tlte future}. ° Desired vs. Actual Investment 1 I — desired or planned investment 3 -\ctua| Investment Savings 3 Unintended Investment -— -\ctua| Investment -l. Unintended Disinvcstineni Actual Investment GOVERNMENT EXPENDITURES (G) Federal. state. and local government spending 0 Two types of (i: a. Direct purchases by government. it. 'I'ransfcr payments which redistributes income from one group to another. FOREIGN SECTOR I. lisports [K]: Expenditures h) doniesiicallv produced goods. 2. imports IV‘IJ: i-Ispendltures by domestic residents on goods produced iii foreign countries. KEYNESIAN EQUILIBRIUM .-\cli tev ctl when: i.()titput - Income t‘i") Aggregate expenditures [.Ali} From 1 l t. we can get equilibrium lncortie or Output [‘i"‘t ‘i' '.-\E Y ('rl-(icx-M ‘i'—a - .\-il’('t‘i"I-l*{i*X-l\'l ‘i'-.\|l*t‘l‘r’i all‘tirX-M ‘i’t I—MPC'J—fli‘er'XA-I ‘i"" ll tl-MPt'i] |:irl-i(}--X-M| 2. Ittiet'tions Leak-ages Approach leakages [EFT-Nit — Injectinm [I it] i Xi Expenditures to '1; fraction Desired Investment " Desired Investment foreigners on Outpulzlnoome Y:C+I+G[X-M Equilibrium Income O Leakages: Inieetions Leakages (Savmgs) injections [Investmentsl Equilibrium Income GDP GAP 8: THE MULTIPLIER - Gaps: Dill'erence bctvveen spending at equilibrium GDP vs. full-employment (EDP. l.Rceessionar_v Gap: Amount by which desired spending at full employment falls short of full employment output. This is represented by the difi'crenee between ‘i’l and ‘r"‘. 2. Inflationary Gap: Amount by which desired spending at full employment esceeds f1lll~CnI|)l0)-’T‘I‘JCI'II output. This is represented b_\' the di It‘erenee hen-teen Y: and Y". Aggregate ’ AE Fxpendilu res. [inflationary] AE ' AE [deflationaryi 45" line i represents Income=0utput1 or Aggregate 1 Production Y1 Y' [equilibrium - Expenditure Multiplier: The multiple by which an initial change iii aggregate spending \vill alter total espenditure alter an infinite number of spending cycles—[l i l-MPt'ii or i | “PM. Simplified Example: (jiveii MPt' -- tilt: Dciltttionarv (rap 53ft" million: assume interest rates do not affect |ii\ esttiieril [l] Question: liovi much ofan increase in Imcstmcnt [1 I is required to suite the Dei‘lationai'y (_iap'.' Answer: I s multiplier Sfitili m l" s [I MPSi Sfitlti m I* 8300 iii x MP5 I*— 5300 [It s [ I-MPF] l* S300 til it till} 1* Stitlm ‘i" $300 mil - Adjustment to (EAI’S I. Keynesian View: (iotei'ntnetii intervention 3.('Ia\'sical View: No government intervention FISCAL POLICY - Definition: The ttse ol'governrnent spending i (it or taxes ITJ to change the level of total spending in the economy. TYPES OF FISCAL POLICY 0 Expansinnar} Fiscal Policv: Increases in government spending or reduction in taxes. Bigger budget deficit [(i'eT]. New Deal was expansionary fiscal policy. (‘ol‘ttraetinnari Fiscal Policy: Decreases in government spending or increases In taxes. Smaller deficit or surplus iti-"Ti. Kevnesian Fiscal Policy: L'se of Spendmg fiscal polic} to eliminate ('ilJIt’ gaps.called discretionary fiscal policy. (“puntercvclical Fiscal Pallet: (io\crniiicnt V1 policy that offsets shocks than would create a business cycle. The government tlstiall} engages iti fine—tuning when it applies discretionary policy to bring the economy back to Ii]ll-t.']‘ttplti)'lni.‘ni level. Automatic Fiscal Stabilizers: Built—in federal expenditure or fixed tax rates that autontaticalls responds countcrcyclicallv to changes in national income. l-Is. When income is high. spending increases. leading to inflationary periods: higher income I‘Iteans increase in tax payments ['1' increase} but this will cause a decrease ill total expenditures. 1 he expenditure curve will drop. tlltls lessening the intIalionaty gap. Also. “Ilil tnore people employed. unemployment compensation it ill decrease [(i decreasci also causing a decrease in total expenditures as Government spends less on this item. Passive Deficit: Deficit portion due to the economy operating below potential income level. Classical: Belief that fiscal policy ttiTecis suppl} side of econottt_v. Advocate tax cuts to stimulate labor supply. productivin and capital accuitiiilatiott. Laffer Curve Hypothesis: ('Ltlltng tax rates vvtll increase lav revenues because of supply side elTects. Spending Spending before ta it C UI Income Most economists believe 1a.\ cuts caused large budget deficits iii ILJHll's. v Structural Budget Deficit: Deficit that would occur at full employment. Most economists believe tax cuts caused large budget deficits in the l ‘tt'ttls. EXPERIENCE WITH FISCAL POLICY ' (imentments have continual espansionan fiscal policies [budget deficits] because they are politically popular - Results and Effectiveness of the amount of fiscal policy cspan sion are sit)“ to achieve and often :no late. IMPORT MULTIPLIER - Similar to consumption. iitiports can be modeled: M m - M PMIYI it here M - total imports. in -- imports is lien ‘i'- I' - MPM — marginal propensity to iitiport 0 Import Multiplier: tl il—lt-IPMIJ DETERMINING THE EQUILIBRIUM PRICE & OUTPUT LEVEL AGGREGATE DEMAND: Total quantity of output demanded at alternative price levels in a given time period ' Reasons why it is tlmvnivarti sloping: |.Real balances effect: Price changes ati'cci the real value ol‘('i|)l’. I 2. Foreign trade el'l'ect: Domestic price increase Inner- exports [Xi and increases imports tat}. (iUIst .or more expensive here and cheaper abroad. I.tt\\et exports and higher imports lower expenditures tilt local goods and services. .lnterest-rate effect: Increase in prices causes an increase in Money Demand. Increase in demand for money raises interest rates. which lower int esttnetits. lowering total expenditures. AE 'a) D: C+IT+G+X1I~M1IPM¢93 C+IU+G+XG'MC IP01 C+l2+GtX2-M2 [PD-(.95 WhereIl17ln>l2.lx1>x.g:vx2. size-Masai. ADicunie Y YUEPOi YiijP‘lt‘ AGGREGATE SUPPLY: 'l'otal quatttit} of output produced at alternative price levels in a git on time period - Short Run Aggregate Suppl). ISRASi: l..5\s price level rises. quantity ot'oulpttt rises as l'it'iiis seek higher profits. In short run. prices ol' inputs are fixed or sticky legit-ages}. 2. .-’\s l'irnis expand output c\ en with fixed ili|'lttl prices. price level rises because of diminishing returns [lieu labor less productive l. - Long Rtiti Aggregate Suppl) tilt-‘51:: .-‘\s price Ictcl rises. no Increase in output because input prices I'|\v‘ proportionater NO PAYOFF TO CHANGING AGGREGATE DEMAND IN THE LONG RUN - Increase in aggregate demand AD” to AI). ItlU\ cs ecotton‘iv to short run equilibrium limit a to b above full employment because wages are stick}. ' .-’\s \v ages atlptst upward. LRAS SEAS: short run :iggicgzitc p ' supva gradually shifts ttpwanl Irom It to c. - Short run equilibrium '3 output graduth falls Pe to longrun equilibrium 3 l . r at [all employment Y; .- f A3' to ‘i'i. In tltc long run ' = output cannot be raised above Y'- and attempts D to do so merely raise i". ' Raltunul lispcctalititts Economists believe economy goes directly from original long run equilibrium to neiv long run equilibrium if gov ernment policy is anticipated. Y2|P2l Fu'l - : E'np'Wmenl i -' i Yr Y1 The etleetiv'eitess of fiscal policy also depends on three types of la ts: |. Recognition Lag: Time il takes between the occurrence of the economic condition and policy maker recognition ot‘the situation. 2. Implementation Lag: If an act of congress is required. it can take some time for congress to debate and approve the hill. 3. Effectiveness Lag: After the policy is implemented. it can take time for the policy to have an impact on the economy tes. in the late “ills. Greenspan tried to anticipate inflationary tendencies by tightening the money supply lincreasing interest rates] ahead of time i. BURDEN OF NATIONAL DEBT Accumulated debt of the federal governitient. - Debt Service: the interest required to he paid each year on outstanding debt {current tlel'icil 8; debtl ' Transfer remurces from bond holders to tax payers. .\|o net change. ' Ftittirc gettcrulit‘iiis transfer resources from tax payers to bond holders. ' External Debt: [1%. government debt {Treasury bonds] held by foreign households. businesses and gov ernntenls. lntposcs '.I burden on future generations. - {'i'owding out investment leads to slower growtlt for future generations. PROBLEMS WITH FISCAL POLICY 1. Acetirate measure of variables: The governtticiit can otin estimate the sizes of \e‘lPC. “PM and other exogenous variables. 3. Government is not able to change (i or'l' quickly. as it is often subject to legislation as well as checks and balances betvveen the Executive and Legislatiu‘ bodies. .I-'inancing deficits can have oil-netting cITcL‘ts. - (‘rnuding nut: ('Iassical economists believe that \\ hen finances i1 deficit. the expansionary colilracllonary effects are not fully realiled. If government sells bonds to finance an expansionary fiscal policy. it is taking away funds from :1. possible private iti\ estincnt [Tl underiakuig. therefore increase it] (i is offset by a decease in l. 4 Fiscal policy can conflict with other goals. Ex. l'lcllationary gap and large public debt. Solving the detlaiionary gap may require an increase in (i. Increasing ti honey er. I‘ur'tlter raises the budget deficit {fir-"Tl increasing public debt as funds are bormvv-ct‘l. 'a) gt“ L‘rl‘llllL‘lll MACRO THEORIES - {'Iassical Theory: iProponent: Adam Smith. ete.i “ages and prices are flctiblc. The econoitiy self- .Idiusts lti deviations from its long term growth Irciid minimum government interyention required. Persistent uncmploymci‘il rcqutrcs supply side policies e.g. deregulation and tax cuts. Political conservatives. - classical Equilibrium: Prices LRAS SRAS ' GDP Long Ftun' i\:‘l.titttll0tl: Short run equilibrium occurs where the vital—Run Aggregate Supply curve ISRASJ intersects \__‘-__-i.‘galc Demand t.-'\Dl. This is temporary. The economy “ill self-adiust so that both curves Wlll intersect on the Long—Run Aggregate Supply ilk/Vii thus achieving economic stability with iiili employment. - Kc) nesian Theory: iProponenl: Britiin economist John \I.1‘-‘l.t|’d Keyiiesi “ages and prices are sticky (slow to -i I‘rnate demand is inherently unstable. thtis rig active government intervention. Persistent . :pluy iiicnt requires demand side policies. cg. increases :m '.‘]'|‘.l'llt_‘|ll spending and tax culs. Political liberals. :- EFFECT OF TAXES ON INCOME Lump-sum Tax The Consumption equation is transformed: C '— a é MPt‘ t‘i' —‘I'i'. (" " a r MPl't‘t'l- MPU'I'J " The tar multiplier: .-'\l equilibriun‘i. ‘r' — AI: Assuming (‘ is Ilte only espenditure consumption. ‘r' — (' ‘i' a * MPCIYI MPCITI ‘i' — VIPCi‘i'i a - \IPE'tTl ‘i't l-M‘ll’t"! — a MPL'I'I'l YIMPSI - :1 — X-II’Il'tTl Y — all MPSl ilk-{PC NIPSHT) This implies the Tax- multiplier MP'Z‘J. DIFFERENTIAL EFFECT OF INCREASING TAND G If I' and (i are increased by the same amount. the net ell‘ecl on Y is the increase in U. Explanation: The etl‘cct of each component on ‘i' is based on their respectisc i‘ntiltipliers. Assuming all other components are unchanged: AT = l I 'll—MF'C‘Jl (i - {MPC t I-MPCll T Assuming S-Hl (i = T. .X‘i’ ll tl-MPC'll S40 - {K-II’C' l I-Mpfll 540 .'\‘t’ — 34tlltl tl—Nll’bll - i \ll’f l l-MPCJJI A‘i' S4U[l I-MPfl { l-MPCIII at 31-min Where 3. '—' change N-ll‘C‘ RIPS or MPC [ I - PARADOX OF THRIFT - When investment depends on income. an attempt to increase saving can result in reduced sat ings. - Individuals who save more can cause income to decrease. leading to a decrease in overall savings {3 _i. Aggregate Expenditures FSNANCIAL SECTOR The works Classical Vie“: Interest Flats financial market stiioolhly. Investment and savings will always be equal. Interest rates change to ensure this equality. Keynesian View: Savings and investments are often 5 Y unequal with the monetary sector not noi'kiiig correctly. The real sector is affected. A D does not equal AS. The imbalance affects the real sector [due ineslly to the multiplier etl'ects]. The savings curve is viewed as \ertical and unaffected by interesi Discretionary fiscal policy needs to be implemented in increase decrease savings: rate changes. Interest Ftate When investments decrease. the inierest rate will not adjust quickly to rtl to bring the economy- to equilibrium. Instead the multiplier process will occur and will shift the S curve to Si atid be back iii equilibrium all is" before interest rates even drop to itl. MONEY AND BANKING MONEY: Anything generally accepted as a medium of exchange. 0 Characteristics of Good Money: Relatit ely constant and limited supply. difficult to counterfeit. divisible. durable. small and portable. lis. Gold became the most important form of money In ITtli and lttIli century. Problems: relatively heat}. easy to counterfeit. subject to fluctuations i'uhen nevv gold is discovered}. led to replacement of gold \vilh paper money. (told it as deposited at the goldsmitlt. who issued receipts for the gold to the depositor. The depositor would then issue the receipts as payment for goods and services. The receipt had value because it tv as backed b_\ the gold on deposit. - [$95 of Money: I. Vledium ot‘csctiange 3. Store of value 3. Unit ol'accotlltt Types of Honey |. Commodity money: Value as commodity money 2. Fiat money: Money- declared by government its. legal tender. Value as commodity value as money ‘ Money Supply |. Basic Money Supply t.\I | i'- currency- Iteld by the public outside banks [checking accountsl r balances in demand deposits including travelers checks .MJ .\t| sav iiigs accounts - small time deposits i- SIlIIHIIIUl MS N13 - large time deposits | '~ SItllllJtllJ} 4. I. the broadest definition of money supply. consisting of all short—term {matures less than or equal to 1 year] financial assets. 1. refers to liquidity .(‘redit (art! is not money: Money is a financial asset belonging It! indit iduals and a liability to banks. (‘redit card is a savings item made at ailablc to be borroued. (‘redit is not an assei. BANKING ' Financial value as Intermediary: Ranks function as an intermediary between lenders 8: bortouers b_\ holding deposits and making loans. 0 Bank Rt‘scn'es: Vault caisli and deposits at chc:'al Reserve called federal funds. In general. reserves l.\ the amount ofcash a bank keeps oit band to manage iitilou s and outtlou s. Banks lend each other excess funds at the federal funds interest rate. Some reserves are required b_\ central bank as :1 ratio iproportionl of deposits as a reserve against cash “'Ill‘lllrau'als. Expected rule: the more liquid the asset. the higher the reserve reth ‘ntcnt ' Honey (‘reatinm |. How hanks create money: Banks create demand deposits. part ol‘tlie money supply. at hen making bank loans. 2. Money multiplier: the amount idollarsi ot‘titoncy that the banking system can create them SI of escess rescnes. 3. Maximum money creation: a. Assumes public deposits all money reeeiv ed and does not add to cash leakage. b. .-'\ ssuines banks letid or spend all eycess rcsertes. c. Foriiitila: increse _ 1 increase in In moneyI required reserve ratio excess reserves 4. 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This note was uploaded on 03/10/2011 for the course ECONOMIC 2009 taught by Professor Steven during the Spring '10 term at Alderson-Broaddus College.

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macro - ad! BUSINESS 0 OVERVIEW ' Imnomiu: ['hc «My .11'...

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