macro notes 2

macro notes 2 - Macroeconomics Test 2 Batzner 1 C= Cbar...

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Macroeconomics- Test 2 Batzner 1 C= Cbar + mpc (YD) Without taxes: Y-T=YD, T=0, Y=YD C=Cbar+ mpc(Y) AE= C+I+G+NX AE=C bar+ mpc(Y)+ I bar+ G bar+ NX bar AE= AE bar + mpc (Y) At equilibrium : AE=Y, Y= AE bar + mpc (Y) Solve for Y, Y-mpc Y= AE bar Y(1-mpc)= AE bar Y= (1/1-mpc) *AE bar Multiplier Autonomous spending 1. spending more than we can produce (inventories down), 2. Reaction to this reduced inventory by firms, 3. More spending- more money- more jobs- economy is leveled out. 1. spending more than we produce, inventories down, 2-reaction to inv reduced ,3-more spending AE=Y 1 3 AE1 Cycle is continuous until we reach a new equilibrium point 2 AE0 Change in Y= (1/1-mpc) * change in AE bar YD Y1- new equilibrium mpc=.8, (1/1-.8)=1/.2= 5 What about taxes? YD= Y-T, let T=tY. C=c bar+ mpc(Y-tY) C=c bar+ mpc (1-t)Y + I bar + G bar + NX bar AE= AE bar + mpc (1-t)Y Y=AE bar+ mpc(1-t) Y Y-mpc(1-t)Y= AE bar Y(1-mpc (1-t))= AE bar Y=( 1/(1-mpc (1-t)) * AE bar What does taxes do to the multiplier? Let mpc= .75, t= .25 1/ 1-mpc vs. 1/ 1-mpc *(1-t) 1/1-.75 1/1-.75(1-.25) 1/.25 1/1-.75(.75)= 1/1-.5625 4 2.2857 – TAXES CUTS THE MULTIPLIER IN HALF
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Macroeconomics- Test 2 Batzner 2 AE AE=Y AE bar Ae no tax AE tax YD Y1 Y Change in Y= 4 * change in Ae bar (more volatile) vs. change in Y= 2.3 * change in Ae bar (less volatile) How is that different from a flat tax? Let T=T bar, C= C bar + mpc( Y- T bar) AE= C bar + mpc (Y- T bar) + I bar + G bar+ NX bar Y= AE bar + mpc(Y)- mpc (T bar) Y- mpc Y= AE bar – mpc T bar (1-mpc) Y= AE bar- mpc T bar Y = (1/1-mpc)* AE bar – mpc/ 1-mpc * T bar OR Y= 1/1-mpc * (AE bar- mpc T bar) Income- Expenditure Model of GDP: uses unplanned changes in inventory to restore equilibrium At a given price level, AE=Y in equilibrium AE AE=Y C=I+G+NX Potential GDP Actual GDP Y Potential= full employment GDP= YFE Problem comes in when Y> YFE Wages rise and price rises Actual GDP > YFE= inflationary gap Price levels must rise to restore equilibrium Consumers are also the component of the economy -sensitive to prices. Prices go up, Consumption goes down
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Macroeconomics- Test 2 Batzner 3 AE AE=Y AE= C+I+G+NX AE= C1+I+G+NX Y Deriving AD from the Income- Expense Model Higher prices lead to lower consumption AE=Y AE2(P2) AED ( P0) AE 1 ( P1) P P1 * Y=GDP=Quantity of production P0 * AD’ P= price level CPI P2 * Y1 YD Y2 Y Discretionary Fiscal Policy: intentional AD management (1) Expansionary: increase in G, decrease in T or t, increase in transfers (opposite of taxes, government paying citizens- Medicare, social security, unemployment) ( EXPAND ECONOMY) Net taxes= Taxes- Transfers (2) Contractionary: decrease in G, increase in T or t, decrease in transfers (CONTRACT ECONOMY- to regulate inflation (too many people employed) ) What the government budget really is Government budget= federal budget Prior to 1921, Congress did its own budget- no President intervention 3% of GDP- not considered significant Office of Management & Budget created to oversee and develop future budgets
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macro notes 2 - Macroeconomics Test 2 Batzner 1 C= Cbar...

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