Macroeconomics Final

Fall, fall

Right

LRAS, recessionary/inflationary gap

Q1>Qn

Inflation

Shortage

Rise, rise

Left

Limited recourses, current state of technology

Limited recourses, current state of technology and social constraints

Consumption+Investments+Government purchases+Foreign sector

Nominal GDP divided by price index multiplied by 100

Challenged all 4 of the classical beliefs

1. Say's law holds, so that insufficient demand in the economy is unlikely 2. Wages, prices and interest rates are flexible 3. The economy is self-regulating 4. Laissez-faire is the right economic policy

The relationship between consumption and disposable income

Disposable income, is positive even at zero disposable income

C=Co+(MPC)(Yd)

Autonomous consumption, the part of consumption that is independent of disposable income

Marginal propensity to consume, MPC= change in C/change in Yd

Disposable income

Disposable income-consumption

Marginal Propensity to save, the portion of a change in income that is not spent

1-MPC

1. Slow way: round of spending 2. Quicker way: spending multiplier

M=1/1-MPC or 1/MPS

M x initial change in spending

C, I, G or Xnet

When the economy does not remove itself from a recessionary or inflationary gap (in a timely manner) government intervention in the economy is necessary to push macroequalibrium toward full employment

Help improve the economy

Revenue and expenses

Taxes

Government expenditures

A tax where the tax rate paid increases as income increases

A tax where the tax rate paid remains constant as income increases, also known as flat tax

Tax where the tax rate paid decreases as income increases

Employer pays 6.2% of income up to 117K Employee pays 6.2% of income up to 117K

Employer and employee pay 1.45% of all income earned, is a proportional tax

Income up to 117K and regressive for higher income

Regressive tax, state of CA charges a 7.25% sales tax, San Diego a .50% sales tax

Regressive tax, in San Diego it averages around 1.25% of the property value

Government spending > tax revenue

Tax revenue > government spending

Government spending = tax revenue

Results form a downturn (contrition) in the business cycle

Results from political decisions and would exist even if the economy were operating at full employment

The total amount the federal government owes its creditors (total amount of outstanding federal government securities)

Changes in government spending and taxes in an attempt to improve the economy (responsibility of the president and congress)

Changes in the money supply and interest rates in an attempt to improve the economy (responsibility of the Federal Reserve)

Used to close a recessionary gap, involves government spending going up and/or taxes going down

Used to close an inflationary gap, involves taxes going up and/or government spending going down

A cut in marginal tax rates, motivates people to work more, save more and take financial risks, SRAS curve shifts to the right

When the tax rate is either 0 or 100% tax revenues are zero

Occurs when an increase in government spending causes the financing needs of the federal budget deficit to rise (indirect effect), can be complete or incomplete

Is not impacted

Somewhat increases

Increases

It takes time to collect and publish economic data to recognize an economic problem

Time needed to be sure that the perceived economic problem needs government intervention

After policy makers decide that some type of fiscal policy measure is required, congress or the president will have to propose the measure, build political support for it and get it passed

After enacted, a fiscal policy measure takes time to be put into effect

After a policy measure is actually implemented it takes time to affect the economy

1) No standard of value 2) Requires a double-coincidence of wants 3) Higher transaction costs

1) Medium of exchange 2) Unit of account 3) Store of value

Money is the medium through which transactions take place

We use dollars as a standard unit of value

The ability of an item to hold value over time

General acceptability

Represent loans which must be repaid, they represent the use of someone else's money

Give access to checkable deposits which are already part of the money supply

Currency outside banks + checkable deposits + travelers checks (2.7 trillion)

Through the fractional reserve banking system. Banks are only required to set aside a small portion of each deposit and they are free to loan or invest the remainder

to create new money

A percent of each dollar deposited that must be held on reserve (at the Fed or in the banks' vault)

This is the minimum amount of reserves a bank must hold as mandated by the Fed (R x checking deposits)

Required reserves + excess reserves

insolvency

liabilities > assets

failed and can be shut down

Cushion against bank failures or insolvency

President, senate

Janet Yellin, has served four years as chair

Monetary policy

12 voting members: 7 federal board members, 1 New York district president and 4 other district presidents

Every 6 weeks at Federal headquarters

Supply the economy with paper money, provide a check clearing service, hold bank reserves, supervise banks, serve as a lender of last resort for banks, serve as a fiscal agent for treasury and serve as governments banker

1) Changing the required-reserve ratio (r) 2) Changing discount rate 3) Open market operations

R goes down

R goes up

Discount rate goes down

Discount rate goes up

Refers to the Fed buying and selling US government securities

The Fed sells government securities

The Fed buys government securities

Decrease R, decrease discount rate or buy government securities on open market (money supply goes up)

Increase R, increase discount rate or sell government securities on open market (money supply goes down)

(SDM) = 1/r

SDM x Deposit amount, 1/r x deposit amount

new, from the Fed or drawn on a foreign bank

the Fed sells government securities

1) try to get a loan from another bank 2) try and get a loan from the Fed 3) apply some of its loan repayments to the reserve deficiency position

Discount rate (directly controlled by the Fed)

the federal funds rate (indirectly controlled by the Fed)

1) it sets a federal funds rate target and then 2) uses open market operations to change the federal funds rate so as to "hit" the target

Sell government securities in the open market (which makes reserves more scarce)

a form of debt issued by a corporation or by the government

1) Maturity date: The date on it the bondholder receives the face value 2) Face (par) valure: the amount of money the bondholder receives on the maturity date 3) Coupon rate: determines the amount of annual interest the bond pays

coupon rate x face value

Annual interest + Pbond (price of bond), yield is the interest rate earned on the bond

inversely, bond prices rise interest rate falls, bond prices fall interest rates rise

inverse relationship between the quantity demanded of money balances and the interest rate (the opportunity cost of holding money)

vertical line since it is primarily set by the Fed

-Fed increase the money supply -interset rates fall -investment rises -AD shifts to the right -Real GDP grows

Assets - Liabilities

change in price/change in quantity demanded

new-old/old

households, businesses, government, foreign sector

Land, labor, capital, entrepreneurship

increasing opportunity cost

-increase in recourses -advance in tech -increase in quality of recourses

-price of substitutes (increases, demand increases) -price of complements (increases, demand decreases) -income normal good (increases, demand increases) -income inferior good (increases, demand decreases) -# of buyers (increases, demand increases) -tastes (increase, demand increases) -expectations of buyers

direct relationship between price and quantity supplied

inverse relationship between price and quantity demanded

-subsidies (increase, supply increases) -taxes (increase, supply decreases) -technology (increases, supply increases) -other goods prices (increases, supply decreases) -recourse costs (increase, supply decreases) -# of sellers (increase, supply increases) -expectations of sellers

highest price at which a product can be legally sold, only impact if below equilibrium

the lowest price at which a product can legally be sold, will only impact if above equilibrium

(total $ expend on market basket in current year)/(total $ expend on market basket ) x 100

nominal income/CPI x 100

Price earlier year x (CPI current year)/(CPI earlier year)

population - non-participants in the Labor force/Labor force

(unemployed)/(Labor force) x100

wages + proprietor's income + corporation profits + rental income + net interest

(nominal GDP)/(price index) x 100