March 07, 2017

Automatic or built-in stabilizers

• Anything that increases the government's budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policy makers

Transfer payments

• Welfare checks, food stamps, unemployment checks, corporate dividends, social security, and veteran’s benefits

Automatic stabilizers

• The automatic stabilizers may be called the automatic pilot of our economy, not very well suited for takeoffs and landings, but fine for the smooth part of the flight. But when the going gets rough, the economy must use manual controls

If the government increases expenditures on goods and services and increases taxation by the same amount, which of the following will occur?

• B) aggregate demand will increase

March 06, 2017

How does the government stabilize the economy?

• Actions are taken by congress to stabilize economy

Fiscal Policy

• changes in expenditures or tax revenues of federal govt
• 2 tools of fiscal policy
• taxes govt can increase or decrease taxes
• spending govt can increase or decrease spending
• Fiscal policy is encoded to promote our nation's economic goals: full employment, price stability, economic growth

Deficit, Surplus, and Debt

• Balanced budget
• revenues = expenditures
• Budget deficit
• revenues< expenditures
• Budget Surplus
• revenue> expenditures
• government debt
• sum of all deficits - sum of all surpluses
• Government must borrow money when it runs a budget deficit
• Government borrows from
• individuals, corporations, financial institution, foreign entities of foreign

Fiscal policy 2 options

• Discretionary Fiscal Policy(action)
• expansionary fiscal policy- deficit
• contractionary fiscal policy-  surplus
• Non Discretionary Fiscal Policy (no action)

3 types of taxes

• 1) progressive taxes- takes a larger percent of income from high income group
• ex: current federal income tax system
• 2) proportional taxes (flat rate)- takes same % of income from all income groups
• 3) Regressive tax- takes larger percentage from low income groups

Contractionary Fiscal Policy

• laws that reduce inflation, decrease GDP
• decrease government spending
• tax increase
• combinations of the two

Expansionary FP

• law that reduce unemployment and increases GDP
• increase government spending
• decrease tax on consumers
• combinations of the two

Automatic/Built in stabilizer

• Anything that increases govt budget deficit during recession and increases its budget surplus during inflation without requiring explicit action by policymakers
• 1) transfer payments
• welfare checks, food stamps, unemployment checks
• 2) progressive income tax
• automatic stabilizers take 33-50% out

February 24, 2017

A multiplier is an initial change in spending (C, Ig, G, Xn) causes a larger change in aggregate spending, or Aggregate Demand m(AD).

The formula for multipliers

• change in AD / change in spending. 

The multiplier effect occurs because expenditures and income flow continuously which sets off a spending increase in the economy.

The Spending Multiplier can be calculated from the MPC or the MPS.

• Multiplier = 1 / (1-MPC)  or 1 / MPS
• Multipliers are (+) where there is an increase in spending and (-) when there is a decrease; pretty straight forward.

Calculating the Tax Multiplier

• When the government taxes, the multiplier works in reverse because the money leaves the circular flow.
• -MPC / (1-MPC)     OR    -MPC/MPS
• If there is a tax CUT, the multiplier is - because there will be more money in the circular flow.

February 23, 2017

Disposable Income (DI) - income after taxes or net income

• DI = Gross Income - Taxes

Two Choices

• With disposable income, households can either consume (spend money on goods and services) or save (not spend money on goods and services)

Consumption

• Household spending
• The ability to consume is constrained by
• The amount of disposable income
• The propensity to save
• Do households consume if DI = 0?
• YES (credit cards)
• Autonomous consumption
• Dissaving

Saving

• Household not spending
• The ability to save is constrained by
• The amount of disposable income
• The propensity to consume
• Do households save if DI = 0?
• NO

APC (Average Propensity to Consume) and APS (Average Propensity to Save)

• Average Propensity to Consume
• C / DI

• APC + APS = 1
• 1 - APC = APS
• 1 - APS = APC
• APC > 1 = DIssaving
• Negative APS = DIssaving

MPC and MPS

• Marginal Propensity to Consume
• ΔC / ΔDI
• % of every extra dollar earned that is spent

• Marginal Propensity to Save
• ΔS / ΔDI
• % of every extra dollar earned that is saved

• MPC + MPS =1
• 1 - MPC = MPS
• 1 - MPS = MPC

Determinants of C and S

• Wealth
• Expectations
• Household Debt
• Taxes
  

February 21, 2017

Aggregate supply

• the level of Real GDP that firms will produce at each price level
• Aggregate supply splits into 2 categories

Long-Run

• Periods of time where input prices are completely flexible and adjust to changes in the price level.
• In the long run, level of REAL GDP supplies is independent of the price level.
• The Long-Run Aggregate Supply or LRAS marks the level of full employment in the economy
• Analogous to PPC
• Yf = full employment

Short-Run

• Period of time where input prices are sticky and do not adjust to changes in the price-level.
• In the short-run, the level of Real GDP supplied is directly related to the price level.
• Since input prices are "sticky", the SRAS will slope upwards.
• Changes in SRAS
• Increase = shift to the right
• Decrease = shift to the left
• Shifts is based on per unit cost of production
• Per-unit production cost = total input cost / total output
• Determinants of SRAS
• Input prices
• Domestic Resource Prices
• Wages (75% of all business costs)
• Cost of capital
• Raw Materials (commodity prices)
• Foreign Resource Prices
• Strong $ = lower foreign price
• Weak $ = higher foreign price
• Market Power
• Monopolies and cartels (both are illegal)
• Increase in Resource Prices = SRAS shifts left
• Decrease in Resource Prices = SRAS to the right
• Productivity
• Productivity = total output / total input
• More productive = lower unit production cost = SRAS to right
• Lower productivity - higher unit production cost = SRAS to left
• Ex: When business is busy, all employees needed. When business is slow, you may need to cut employees
• Legal-Institutional Environment
• Taxes and Subsidies
• Taxes ($ to gov) on business increase per unit production cost = SRAS to left
• Subsidies ($ fr gov) to business reduce per unit production cost = SRAS to right
• Government Regulation
• Government regulation creates a cost of compliance = SRAS to left
• Deregulation reduces compliance costs = SRAS to right

February 16, 2017

Investment - money spent or expenditures

• New plants (factories), Capital Equipment (machinery), Technology (hardware or software), New Homes, Inventories

Expected Rates of Return

• How does business make investment decisions?
• Cost/Benefit analysis
• How does this determine the benefits?
• Expected rate of return
• How does business count the cost?
• Interest costs
• How does business determine the amount of investment they undertake?
• Compare expected rate of return to interest cost
• If expected return > interest cost, then invest
• If expected return < interest cost, then do not invest

Real (r%) vs Nominal (i%)

• How do you compute the real interest rate?
• r% = i% - 𝛑%
• What then, determines the cost of an investment decision?
• The real interest rate

Investment Demand Curve (ID)

• What is the shape of the Investment Demand curve?
• Downward sloping
• Why?
• When investment rates are high, fewer investments are profitable; when interest rates are low, more investments are profitable

Shifts in Investment Demand (ID)

• Cost of Production
• Business Taxes
• Technological Change
• Stock of Capital
• Exchange