March 06, 2017

Fiscal Policy Notes

How does the government stabilize economy?

• Government has two different two boxes it can use
• Fiscal Policy- Action by congress to stabilize the economy. 

What is Fiscal Policy?

• Change in the expenditures or taxes revenues of federal government
• Two tools of Fiscal Policy 
• Taxes- Government can increase or decrease taxes.
• Spending- Government can increase or decrease spending.
• Fiscal Policy is enacted to promote our nation's economic goals: full employment, price stability economic growth. 

What is Deficit, Surplus, & Debt? 

• Balanced budget
•  Revenue = Expenditures 
• Budget deficit
• Revenue < Expenditure 
• Budget Surplus 
• Revenue > Expenditure 
• Government Debt 
• Sum of all deficits- Sum of all surpluses 
• Government borrows from 
• Individuals
• Corporations 
• Financial Institutions 
• Foreign entities or foreign government 

What are the Fiscal Policies two options? 

• Discretionary Fiscal Policy (Action)- 
• Expansionary fiscal policy - DEFICIT 
• Contractionary fiscal policy - SURPLUS 
• Non-Discretionary Fiscal Policy ( No Action) 

What are the three types of Taxes?

1. Progressive Taxes- Takes a larger percent of income from high income groups (takes more from rich people)  ex: Current Federal System 
2. Proportional Taxes (Flat Rate) - Takes the same percent from all income groups. ex:20% fiat income tax on all.
3. Regressive Taxes- Takes laeger percent from low income groups (takes more from poor people) ex: Sales Taxes 

What is Contractionary Fiscal Policy? 

• (The BRAKE) Laws that reduce inflation, decrease GDP (Close an inflationary gap) 
• Deficit ↓ Surplus ↑
• Decrease Government Spending 
• Tax Increases 
• Combinations of the two 

What is the Expansionary Fiscal Policy?

• (The GAS) Laws that reduce unemployment & increase GDP (Closes Recessionary gap) 
• Increases Government Spending
• Decreases taxes on Consumers

February 23, 2017

Consumption & Saving Notes 

What is disposable income?

• Income after taxes or net income
• DI = Gross Income - Taxes 

2 choices

• With disposable income, households can either 

• Consume ( Spend money on goods & services )
•  Save ( not spend money on goods & services ) 

what is consumption?

•  Household spending 
• He ability to consume is constrained by 
• -the amount of disposable income 
• - the propensity to save 
• Do households consume if DI = 0? 
• -autonomous consumption 
• - dissaving

What is saving? 

• Household NOT spending 
• The ability to save is constrained by 
• -amount of disposable income 
• -the propensity to consume 
• Do households save if D1=0?
• -no

How to calculate APC & APS

• APC + APS = 1 
• 1 - APC = APS
• 1 - APS = APC 
• APC > 1 = Dissaving 
• ( - ) APS = Dissaving

What is MPC & MPS? 

• MPC 
• change consumption / change D1
• % of every extra dollar earned that is spent 
• MPS 
• change in s / change in D
• % of every extra dollar earned that is caved 
• MPC + MPS = 1 
• 1 - MPC  =  MPS 
• 1 - MPS = MPC 

What are the determinants of consumption & saving?

1. Wealth
2. Expectations 
3. Household debt 
4. Taxes 

Reasons why prices tend to be inflexible or "sticky" in a downward direction?

1. Menu cost 
2. Wage Contracts
3. Minimum wage 
4. Fear of Price War 
5. Morale effort & productivity 

February 21, 2017

Aggregate Supply & Aggregate Demand

February 21, 2017

Aggregate Supply

What is Aggregate Supply?

• It is the level of Real GDP (GDPr) that firms will produce at each price level (PL) 

What is Long Run Aggregate Supply?

• It is the period of time where input prices are completely flexible & adjust to changes in price-level
• In the long run, the price-level of Real GDP supplied is independent of the price-level.

What is Short Run Aggregate Supply?

• It is the period of time where input prices are sticky & 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

What does Long Run Aggregate Supply look like?

• In the long run aggregate supply or LRAS marks the level of full employment in the economy.

What does Short Run Aggregate Supply look like?

• Because input prices are sticky in the short run the SRAS is upward sloping. 

Changes in Short Run Aggregate Demand?

• An increase in short aggregate supply is seen as a shift to the right . ( SRAS ←) 
• An decrease in short aggregate supply is seen as a shift to the left. ( SRAS →)
• KEY TO UNDERSTANDING SHIFTS IN SRAS IS PER UNIT COST OF PRODUCTION. 
• PER UNIT PRODUCTION COST = Total Input / Total Output 

What are the determinants of SRAS?

• Input Prices 
• Productivity 
• Legal- Institutional Environment 

What are Input Prices?

• Domestic Resources Prices
•  Wages ( 75% of all business costs) 
• Cost of capital 
• Raw Material ( Commodity Prices ) 
• Foreign Resources Prices
• Strong $ = Lower foreign resources prices
• Weak $ = Higher foreign resources prices 
• Market Power 
• Monopolies & cartels that control resources control the price of those resources.
• Increase in Resources = SRAS 
• Decrease in Resources = SRAS 

What is productivity?

• Productivity = Total Output / Total Input 
• More productivity = Lower unit production cost = SRAS →
• Lower productivity = Higher unit production cost = SRAS ←

What is Legal-Institution Environment?

• Taxes & Subsidies 
• Taxes ( $ to government ) on business increase per unit production cost = SRAS ←
• Subsidies ( $ from government ) to business reduce per unit production cost = SRAS →
• Government Regulation 
• Government regulation creates a cost of compliance = SRAS ←
• Deregulation reduces compliance cost = SRAS →

February 16, 2017

 Interest rates and Investment demand notes 

 What is investment?

• Money spent or expenditures on 
• New plants (factories) 
• Capital equipment (machinery)
• Technology ( hardware and software )
• New homes 
• Inventories (  good sold by producer ) 

 What is expected rate of return?

•  How does business make investment decisions? 
• Cost/benefit analysis 
• How does businesses determine the benefits? 
• Expected rate of return
• How does businesses count the cost?
• Interest costs 
• Determine 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 don't invest 

r% = I% - π%

r = Real

I = Nominal

π = Inflation

What determines the cost of an investment decision?

• The real interest rate (r%)

What is the Investment Demand Curve?

• What is the shape of the investment demand curve?
• Downward sloping
• Why?
• When Interest increases, fewer investments are profitable; When Interest rates decreases, more investments are profitable

What is the shift in Investment Demand?

• Cost of production
•  Business Taxes
• Technological change
• Stock of Capital
• Expectations

February 15, 2017

Aggregate Demand 

Graph aggregate demand curve

• AD is the demand by consumers, businesses, government & foreign countries. 
• change in price level cause a move along the curve NOT a shift of the curve. 

What is aggregate demand? 

• shows the amount of real GDP that the private, public, and foreign sector collectively desire to purchase at each possible price level. 
• relationship between the price level and the level of real GDP is inverse. 

3 reasons why AD is downward sloping?

1. Wealth effect 

• ↑ price reduce  purchasing power of $ 
• ↓ Quantity of expenditures 
• ↓ Price levels increase purchasing power and ↑ expenditures. 
• price level ↑, GDP demanded  

2. Interest Rate Effect 

• as price level ↑ , lenders need to charge ↑ interest rates to get REAL  return on their loans. 
• ↑ interest rates discourage consumer spending and business investment. 
• price level ↑ , GDP demanded ↓

3. Foreign Trade effect

• when US price ↑, foreign buyers purchase fewer US goods and Americans buy more foreign goods. 
• Export falls and import rise, causing real GDP demanded to fall. (Xn decreases) 

What is shift in AD? 

• 2 parts to shift in AD 
•  A change in C, Ig, G, and I  or Xn 
• A multiplier effect that produces a greater change than the original change in the 4 components 
• increase in AD = AD →
• decrease  in AD = AD ←

 What is increase in AD?
(GRAPH)

 What are the determinants of AD?

•  consumption
• Gross private investment
• Government spending
•  net exports

1.   Consumption

• consumer wealth ( boom in stock market)
• consumer expectations (people fear recession)
• household indebtedness  (more consumption debt)
• Taxes (decrease in income taxes)

2.  Change in investment spending

• Real interest rate  (Price of borrowing money)
• future businesses expectations
• productivity and technology

3.  Government spending

• war
• healthcare
• decrease in defense spending

4.  Change in net export

• Exchange rates
• National income compared to abroad

AD = GDP = C + I + G + Xn

 What about government spending?

• more government spending ( AD →)
• Less government spending (AD ←)