March 20, 2017

Unit 4 Notes

Why do we use money?

• What would happen if we didn't have money?
• The Barter says: Goods & services are traded directly 
• There is no money exchanged 

What is money? 

• Anything that is generally accepted in payment for goods & services 

Money is not the same as wealth or income

• Wealth is the total collection of assets that store value. 
• Income is a flow of earnings per unit of time. 

What can money be used as?

1. Medium of exchange. (Buy goods & services)
2. Unit of account.(Measuring the value of goods & services)
3. Store of value.

What are the three types of money?

• Representative money (IOU's)
• Commodity money (Salt, Gold, Silver, Cigarette)
  
• Something that performs the function of money & has alternative uses.
• Fiat money (Paper money, Coins) 
• Money because the government says so. 

What are six characteristics of money? 

1. Durability 
2. Portability 
3. Divisibility 
4. Uniformity 
5. Limited supply
6. Acceptability 

What are the three types of money supply?

• Liquidity- ease with which an asset can be accessed & converted into cash (liquidized) 

1. M1- 
• *High liquidity* 
• includes coins, currency, & checkable deposit (personal & corporate checking accounts which are the largest component of M1) 
• In general this is the money supply.
2. M2- 
• *Medium liquidity* 
• M1 + Savings deposits (Money market accounts), & Mutual Funds below money look 
3. M3
• *Low liquidity* 
• M2 + Time deposits above money look

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 ←)