March 20, 2017

Money

The Barter System: Goods and services are traded directly. There is no money exchanged.

Money

• Anything that is generally accepted in payment for goods and services.

*Not wealth or income

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

Money can be used as:

1. Medium of Exchange 

*Buy goods and services 

2. Unit of Account 

*Measuring the value of goods and services 

3. Store of Value 

3 Types of Money:

1. Representative Money: Money that represents something of value 

Ex: IOU's

2. Commodity Money: Something that performs the function of money and has alternative uses 

Ex: Salt, Gold, Silver, Cigarettes 

3. Fiat Money: Money because the government says so

Ex: Paper Money, Coins 

Six Characteristics of Money:

1. Durability 

2. Portability 

3. Visibility 

4. Uniformity 

5. Limited Supply

6. Accessibility 

3 Types  of Money Supply:

•Liquidity: Ease with which an asset can be accessed and converted into cash (liquidized)

•M1 (High Liquidity): Coins, currency, and checkable deposits (Checks; Personal and corporate checking accounts which are the largest component of M1) 

*Demand Deposit or Money Supply

•M2 (Medium Liquidity): M1 plus saving deposits (money market accounts), time deposits (CD's=Certificates of Deposit), and Mutual funds below $100k

•M3 (Low Liquidity): M2 plus time deposits above $100k 

March 7, 2017

Fiscal Policy Day 2

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 policymakers
• Transfer Payments
• Welfare Checks
• Food Stamps
• Unemployment Checks
• Corporate Dividends
• Social Security 
• Veteran's Benefits 

March 6, 2017

Fiscal Policy

Fiscal Policy: Actions by congress to stabilize the economy 

• 2 Tools for Fiscal Policy
• Taxes: Government can increase or decrease taxes
• Spending: Government can increase or decrease spending
• Enacted to promote our nation's economic goals:
• Full Employment, Price Stability, Economic Growth

Balanced Budget

• Revenue = Expenditures

Budget Deficit

• Revenues < Expenditures
• Borrows from:
• Individuals
• Corporations
• Financial Institutions
• Foreign Entities/Governments 

Budget Surplus

• Revenues > Expenditures

Government Debt

• Sum of all deficits - sum of all surpluses

2 Types of Fiscal Policy

• Discretionary Fiscal Policy (Action)
• Expansionary Fiscal Policy: Deficit
• Contractionary Fiscal Policy: Surplus
• Non-Discretionary Fiscal Policy: No Actions

Taxes

1. Progressive Taxes: Taxes larger percent of income from high income groups (more from rich people)
• Ex: Current Federal Income Tax System
2. Proportional Taxes (Flat Rate): Taxes some percent of income from all groups 
• Ex: 20% from all groups
3. Regressive Taxes: Takes a larger percentage from low income groups
• Ex: Sales Taxes

Contractionary Fiscal Policy (The BREAK)

• Laws that reduce inflation, decrease GDP (Close inflationary gap)
• Decrease Government Spending
• Tax Increases
• Combinations of the 2

Expansionary Fiscal Policy (The GAS)

• Laws that reduce unemployment and increase GDP (Close recessionary gap)
• Increase Government Spending
• Decrease Taxes on Consumers
• Combinations of the 2

February 28, 2017

Classical and Keynesian Economics Continued

Classical:

• Trickle Down Theory 
• Help the rich first then everyone else
• In the long run, the economy will balance @ full employment output
• The Invisible Hand

Keynesian 

• AD is the key, not AS
• In the long run, we are dead
• Leaks cause recessions
• Savings cause recessions 

February 27, 2017

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

1. Menu Cost
2. Wage Contracts
3. Minimum Wage
4. Fear of Price Wars
5. Morale, Effort Productivity 

February 24, 2017

Multiplier

The Spending Multiplier Effect: An initial change in spending (C, Ig, G, Xn) causes a larger change in aggregate spending or aggregate demand

Multiplier = Change in AD / Change in Spending (C, Ig, G, Xn)

• Why: expenditures and income flow continuously which sends off a spending increase in the economy

Spending Multiplier = 1 /1-MPC or 1 /MPS

Increase in Spending = +

Decrease in Spending = - 

Tax Multiplier: When government taxes, multiplier works in reverse

• Why: Now money is leaving the circular flow

Tax Multiplier = -MPC / 1 - MPC

or

-MPC / MPS

• Tax Cut = +
• Now more money in the circular flow

February 23, 2017

Consumption and Saving

Disposable Income: Income after taxes or net income

DI= Gross Income - Taxes

• With disposable income, households can either:
• Consume (Spend Money on goods and services)
• Save (Not spend money on goods and services)

Consumption

• Household Spending
• The ability to consume is controlled by:
•  The amount of disposable income
• The propensity to save
• Do households consume if DI=0?
• 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 and APS

APC= Average Propensity to Consume

APS= Average Propensity to Save

APC + APS = 1

1 - APC = APS

1 - APS = APC

-APS = Dissaving

APC > 1 = Dissaving

MPS and MPS

MPC= Marginal Propensity to Consume

Change in C / Change in DI

• % every extra dollar earned that is spent

MPS= Marginal Propensity to Save

Change in S / Change in DI

• % of every extra dollar earned is saved

MPC + MPS = 1

1 - MPC = MPS

1 - MPS = MPC

Determinants of Consumption and Saving

• Wealth
• Expectations
• Household Debt
• Taxes

February 21, 2017

AS/AD Model

• The equilibrium of AS and AD determines current output (GDPr) and the price level (PL)
• Full Employment: Exists where SRAS and LRAS intersects
• Inflationary Gap: Output is high and employment is less than NRU
• Recessionary Gap: Output low and unemployment is more than NRU

February 21, 2017

Aggregate Supply

Aggregate Supply: The level of real GDP that firms will produce at each price level

• Long-Run: Period of time where input prices are completely flexible and adjust to changes in the price level
• The level of real GDP supplied is independent to the 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 (analogous to PPC)

Short-Run Aggregate Supply (SRAS)

• Input prices are sticky and do not adjust to changes in the price level
• Level of real GDP supplied is directly related to the price level
• Upward Sloping
• Increase ---->
• Decrease <----

Per-Unit Production Cost

Total Input Cost/Total Output Cost

Determinants of SRAS

1. Input Prices

• Domestic resource prices 
• Wages (75% of all business costs)
• Cost of Capital
• Raw Materials (Commodity Prices)
• Foreign Resource Prices
• Stronger $= lower foreign price
• Weaker $= higher foreign price
• Market Power 
• Monopolies/Cartels that control resources
• Control price

2. Productivity

3. Legal Institutional Government 

• Taxes and subsidies
• Taxes ($ to government) on business increase pre unit of production cost= SRAS <----
• Subsidies ($ to government) to business reduce per unit production cost= SRAS ---->
• Government Regulation
• Creates a cost of compliance= SRAS <----
• Deregulation reduces compliance cost= SRAS ----> 

February 16, 2017

Interests Rates and Investment Demand

Investment: Money spent or expenditures on

• New Plants (Factories)
• Capital Equipment (Machinery)
• Technology (Hardware and Software)
• New Homes
• Inventories

Expected Rates of Return

• Businesses make investment decisions: Cost/Benefit Analysis
• Businesses Determine the benefits: Expected Rate of Return
• Businesses count the cost: Interests Costs
• Businesses 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%)

• Real Interest Rate (r%)= i%-pi%

Investment Demand Curve (ID)

• Downward Sloping
• Because when interest rates are high, fewer investments are profitable; when interest rates are low, more investments are profitable. 

Shifts in Investment Demand

• Cost of production
• Businesses Taxes
• Technological Change
• Stock of Capital
• Expectations 

February 15, 2017

Aggregate Demand 

Aggregate Demand Curve:

*AD is the demand by consumers, businesses, government, and foreign countries

*Change in the price level cause a move along the curve, NOT a shift of the curve

Aggregate (AD):

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

Reasons Why AD is Downward Sloping

1. Wealth Effect

• Higher prices reduce purchasing power of $
• This decreases the quantity of expenditures
• Lower price levels increase purchasing power and increase expenditures
• Price Level +
• GDP Demand -

*EX: Price in bank $50,000, Inflation reduces purchasing power; you reduce spending

2. Interest Rate Effect

• As price level increases, lenders need to charge higher interest rates to get a REAL return on their loans

• Higher interest rates discourage consumer spending and business investment

*EX: Increase in prices leads to an increase in the interest rate from 5% to 25%. You are less likely to take out loans to improve your business.

3. Foreign Trade Effect

• When US price level rises, foreign buyers purchase fewer US goods and Americans buy more foreign goods. 

• Exports fall and imports rise causing real GDP demanded to fall (Xn Decreases)




*EX: If prices triple in the US ----> Canada no longer buys US goods ----> Quantity demanded of US products fall

Shifts in Aggregate Demand (AD)

• A change in C, Ig, G, and/or Xn

• A multiplier effect that produces a greater change than the original change in the 4 components

Increases in AD= AD ---->

Decreases in AD= AD <----

Determinants of AD

• Consumption (C)

• Change in Consumer Spending

• Consumer wealth (Boom in the stock market)

• Consumer Expectations (People fear a recession)

• Household Indebtedness (More Consumer Debt)

• Taxes (Decrease in Income Taxes)

• Gross Private Investment (Ig)

• Change in Investment Spending

• Real Interest Rates (Price of Borrowing $)

• If interest rates increase/decrease

• Future Business Expectations (High Expectations)

• Productivity and Technology (New Robots)

• Government Spending (g)

• War

• Nationalized Health Care

• Decrease in defense spending

• Change in Net Exports

• Exchange Rates (If US depreciates relative to its Euro)

• National Income Compared to Abroad (If importer or US has a recession)

• "If US gets a cold, Canada gets pneumonia"

Government Spending:

• More government spending (AD ---->)

• Less government spending (AD <----)