March 6, 2017 - Fiscal Policy

11:06 PM

Fiscal Policy

To stabilize the economy, the Government has 2 tools:

Fiscal Policy - Actions by congress to stabilize the economy
Tool 1 - Taxes; Gov can increase or decrease taxes
Tool 2 - Spending:gov can increase or decrease spending
- Fiscal policy is enacted to promote our nations economic goals; full employment, price stability and economic growth

Deficits, surpluses and Debt
- Balanced budget: Revenues =  Expenditures
- Budget deficit: Revenues less than expenditures
- Budget surplus: Revenues greater than expenditures
- Gov Debt: Sum of all deficits - Sum of all surpluses
- Gov can borrow money from: individuals, corporations, financial institutions and foreign entities

Fiscal Policy - 2 Options
- Discretionary fiscal policy - action
- Expansionary fiscal policy - think deficit
- Contractionary fiscal policy - think surplus
- Non-Discretionary fiscal policy - no action

Three types of taxes
1- Progressive Taxes - Takes a large percent of income from high (rich) income groups
2- Proportional Taxes - Takes same percentage of income from all income groups
3- Regressive Taxes - Take larger percentage from low income groups

Contractionary Fiscal Policy (The Brake) - Laws that reduce inflation and decrease GDP
- Lowers gov spending
- Tax increases
- Combinations of the two

Expansionary Fiscal Policy (The Gas) - Laws that reduce unemployment and increase GDP
- Increase gov spending
- Decrease taxes on consumers











February 29, 2017 - MPC/MPS Multipliers

10:43 PM

MPC/MPS Multipliers

The Spending Multiplier Effect - An initial change in spending causes a larger change in aggregate or aggregate demand
- Multiplier = Change in AD / Change in Spending
- Multiplier = Change in AD / Change in C, I, G or Xn

Why It Happens? - Because expenditures and income flow continuously which sets off a spending increase in the economy.

Calculating the Spending Multiplier

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

Tax Multiplier =  -MPC / 1 - MPC or  -MPC/MPS
- When the gov taxes, the multiplier works in reverse because money is how leaving the circular flow
- If there is a tax cut, then the multiplier is (+) because there is more money in the circular flow


February 23, 2017 - Consumption and Saving

9:48 PM

Consumption and Saving

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

2 Choices (With Disposable Income)
- With DI, households can either Consume or Save

Consumption
- Household spending
- Ability to consume is constrained by the amount of available DI or the propensity to save

Saving
- Household not spending
- The ability to save can be constrained by the amount of available DI and the propensity to consume
-Households do not save if DI = 0

Determinants of Consumption and Saving
1. Wealth
2. Household Debt
3. Taxes
4. Expectations

February 21, 2017 - Aggregate Supply

9:37 PM

Aggregate Supply

Aggregate Supply - The level of real GDP  that firms will produce at each price level (PL)

Long Run vs Short Run

Long Run - Period of time where input prices are completely flexible and adjust to changes in price level.
- The level of real GDP supplied is independent of price level

Short Run - Period of time where input prices are "sticky" and do not adjust to changes in the price level.
-The level of real GDP supplied is directly related to the price level

Long Run Aggregate Supply (LRAS) - Marks the level of full employment in the economy
Short Run Aggregate Supply (SRAS) - Because input prices are "sticky"

Changes in SRAS - Increase is a shift to the right and Decrease is a shift to the left

Per Unit Production Cost = total input cost / total output

Determinants of SRAS
1. Input Prices
2. Productivity
3. Legal Institution Environment

1. Input Prices (Domestic Resource Prices)
- Wages (75% of all business cost)
- Cost of capital
- Raw Material

Foreign Resource Prices
- Strong Money = Lowers foreign resource prices
- Weak Money = Higher foreign resource prices

Market Power
- Monopolies and cartels that control resources control the price of those resources

2. Productivity
- productivity = total outputs / total inputs
- more productivity = lower production cost
- lower productivity = higher production cost

3. Legal Institutional Environment
- Taxes and subsidies on businesses increase per unit production cost
- Subsidies to business reduce per unit production costs

Government Regulation - Creates a cost of compliance
Deregulation - Reduces compliance costs










February 21, 2017 - The AS/AD Model

9:16 PM

The AS/AD Model

The equilibrium of AS and AD determines current output

Full Employment - Equilibrium exists where AD intersects SRAS and LRAS of the same point.
Inflationary Gap - Output is high and unemployment is less than NRU.
Recessionary Gap - Output low and unemployment is more than NRU

February 15, 2017 - Aggregate Demand curve

9:11 PM

Aggregate Demand Curve

Aggregate Demand Curve - The demand by consumers, businesses, government and foreign countries.
- Changes in the price level can cause a move along the AD curve, but not a shift

Aggregate Demand (AD) - Shows the amount of real GDP that the private, public and foreign sector collectively desire to purchase at each possible price level.
- Relationship between price level and level of real GDP is INVERSE

3 Reasons Why AD is Downwards Sloping

1. Wealth effect
- Higher prices reduces purchasing power of money
- Decreases quantity of expenditures
- Lower price levels increase purchase power and increase expenditures

2. Interest-Rate Effect
-  As price level increase, lenders need to charge higher interest rates to get a REAL return on loans
- Higher interest rates discourage consumer spending and business investment

3. Foreign Trade Effect
- When U.S price level rises, foreign buyers purchase fewer U.S goods and Americans buy more foreign goods
- Exports fall and imports rise causing real GDP demanded to fall

Shifts in Aggregate Demand
- The 2 parts to a shift in AD are:
1. A change in C,I,G and/or Xn
2. A multiplier effect that produces a greater change than the original change in the 4 components

Determinants of AD
- Consumption (C)
-Gross private investment
- Gov spending
- Net Exports

1. Change in Consumer Spending
- Consumer Wealth (boom in stock market)
- Consumer Expectations (people fear a recession)
- Household indebtedness (more consumer debt)
- Taxes (decease in income taxes)

2. Change in investment spending
- Real interest rates (price of burrowing money)
- Future business expectations (high expectations)
- Productivity and technology (new robots)

3. Changes in gov spending
- War, nationalized healthcare and decrease in spending

4. Change in net exports
- Exchange rates (u.s dollar depreciates relative to the euro)
- National income compared to abroad (if major importer has a recession)












February 10, 2017 -FRQ Formulas Review

7:53 PM

FRQ Review - 2/10/17
  1. Included in GDP - Newly produced goods, goods and services produced and sold by foreigners within our domestic borders. Both tangible goods and intangible services (haircut, housecleaning). Measures only productions within the confines of the country.
  1. Excluded from GDP - Intermediate goods and services, which are used in the production of final goods and services, goods produced in previous years, and foreign products.
Formulas
GDP =  C+I+G+( X - M)
private consumption + gross investment + government investment + government spending +
Net exports (exports - imports)
Budget Deficit/Surplus = Gov purchases + Gov transfer payments - Gov tax/fee collection
Trade Surplus/Deficit = Exports - Imports
National Income = Wage of employee + Rent income + Interest income + Proprietors income + Corporate profits
Disposable Income = National income - Personal house taxes + Gov transfer payments
3. Employment Rate = In the labor force, includes part-time but not full-time students
# of unemployed / # of labor force (unemployed + employed) X 100
4. Inflation Rate = A general rise of prices; reduces the “purchasing power” of money
Current year price index - base year price index /  base year price index X 100
5. Nominal and Real GDP -  
Nominal GDP - The value of output produced in current prices; can increase from year to year if either output or prices increase.


Real GDP - The value of output produced in constant base year prices.

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