Economics Test 3

o This was the prevailing wisdom before the 1930s

When an economy begins to fall into a recession, output, income and employment all start to decline. Tax revenue declines as income declines and rising unemployment triggers increased payments for unemployment compensation. To insist on balancing the budget as recession looms by reducing spending or increasing taxes, would mandate a policy that would worsen the economic situation and ultimately increase the deficit. This is essentially what happened in the early 1930s.

- The CPI is often referred to as

"headline" inflation, which is contrasted with "core" version which excludes food and energy costs. Since food and energy costs are more volatile, the core indexes are considered more reflective of the underlying inflationary trends. o The impact of changes in energy prices will eventually filter back into the economy

o Current Gross Public Debt

$18.2 Trillion $5.1T held by government agencies • $2.8T by social security trust fund • $$1.4T by government retirement funds • $.9T all other, including operating cash $13T held by the public & the Federal Reserve • Foreign ownership $6 Trillion o China owns approximately $1.2 of the $6T • $2.5T Federal Reserve - Quantitate Easing (QE) • $1.1T individuals • $1.0T mutual funds

Types of Unemployment

- Frictional - workers who voluntarily quit their jobs to search for better positions - Structural - unemployment caused by changes in the structure of consumer demands or technology (bank tellers, manufacturing or service employees impacted by jobs moving overseas - textile industry/call centers) o Workers who structurally unemployed must often go through extended periods of training ... education matters - Cyclical - unemployment resulting from changes in the business cycle o Housing market is now on a cyclical upswing o Oil Industry is now on a cyclical downswing

Investment

- Spending by business that adds to the productive capacity of the economy - Investment depends upon factors such as the rate of return (IRR or NPV), the level of technology, and expectations about the economy o The economic boom in the 1990s (Dot-Com bubble) was fueled by investments in information technology infrastructure. The increase came to a halt in the early 2000s when businesses discovered that they had built up massive excess capacity See figure 3 - page 434 ... housing boom/bust .... Oil boom/??

Macroeconomic Equilibrium

- The economy is at rest, spending injections (investments) are equal to withdrawals (savings) S=I

- Cyclically Balance Budget

- balancing the budget over the course of the business cycle by restricting spending or raising taxes when the economy is booming and using these surpluses to offset the deficits that occur during recessions. o Good in theory. In practice, balancing the budget over the business cycle is difficult and politically risky. Raising taxes during boom periods may make good economic sense. However, it is a non-starter in today's political environment.

It has only been in the last century that standards of living have risen substantially and life expectancy has tripled. Even so, much of the world still leads a subsistence life

Poverty level: U.S. $25/day vs. Developing World $2/day

- Annually Balance Budget

federal expenditures and tax receipts would have to be equal each year

- Enforcement of Contracts

o Patent and copyright laws o Every country has its innovators, the only question is whether these people are offered enough incentive to come up with innovations to drive economic growth

Infrastructure and Economic Growth

- Infrastructure is defined as the country's public capital o Dams, roads, bridges, transportation networks, power plants and power transmission lines, telecommunications networks, public education facilities

Discretionary Fiscal Policy:

- Involves adjusting government spending and tax policies with the express short-run goal of moving the economy toward full employment, expanding economic growth, or controlling inflation. o Tax cuts during the Kennedy, Reagan and George W. Bush administrations were meant to influence both aggregate demand and aggregate supply. o Tax increases enacted during the George H. Bush and Clinton administrations were aimed at reducing the government deficit.

The two primary goals of macroeconomic policy

are full employment and low inflation.

Rate of Inflation

is the percentage increase in prices over a 12 month period. An inflation rate of 2% in 2014 means price levels increased by that rate over 2013.

- Protection of Property Rights

o Stable legal systems that protects property rights

- Other determinants of consumption and savings

o Wealth o Expectations o Household Debt o Taxes

- Each month the bureau of labor statistics (BLS) issues updates

on unemployment and the price level.

Gross Domestic Product (GDP)

- A measure of the economy's total output, which is equal to the total market value of all final (value added) goods and services produced by resources in the United States in a given year. o Until the early 1990s the Gross National Product (GDP) was the standard measure of output. GNP includes good produced both home and abroad , as long as the production involves resources owned by US residents o The measurement was switched to GDP to be compatible with the data collected by the rest of the world.

Intergenerational Burdens of Fiscal Policy

- Accounting scandals of the early 2000's (i.e. Enron) caused an uproar resulting in the Sarbanes-Oxley bill which added stiffer penalties to corporate governance laws. - For all the vigor with which politicians and government prosecutors have pursued wrongdoers in the wave of accounting scandals, many economists suspect that federal accounting is no better.

Aggregate Expenditures

- Aggregate Expenditures (AE) = GDP = C + I + G + (X-M)

Business Cycles:

- Alternating increases and decreases in economic activity that are typically punctuated by periods of downturn, recession, recovery and boom (figure 3 page 367) - Business cycles are officially dated by the National Bureau of Economic Research o July 1981 (peak)/Nov 1982 (trough) - Max unemployment 10.8% o Dec 2007 (peak)/Jun 2009 (trough) - Max unemployment 10.4% - Do waves of innovation explain business cycles? o Schumpeter - "creative destruction" to describe waves of innovations that are the driving force behind business cycles Industrial revolution IT revolution (postindustrial society)

The great depression changed political and economic thinking in the U.S.

- Before the depression government spending (Federal, state and local) was roughly 10% of the economy. Today the figure has tripled (Federal 18 - 20%, state & local approximately 10%). - Most of the changes in post-Depression economic thinking can be traced to one book, The General Theory of Employment, Interest, and Money by John Maynard Keynes, published in 1936.

Fiscal policy involves adjusting government spending (on goods and services), transfer payments, and taxes with the express purpose of managing the macro economy.

- Congress (at the urging of the President) passed a huge ($787B) stimulus package that included tax reductions and rebates with a large dose on infrastructure spending. - They also implemented monetary policy changes which will be covered in a subsequent chapter.

Consumption & Savings

- Consumption spending grows as income grows, but not as fast - As income grows, savings will grow as a percentage of income - Classical economists assumed that the interest rate was the principal determinant of savings, and by extension the principal determinant of consumption o Keynes emphasized that income was the key determinant of consumption and savings

Categories of Spending:

- Discretionary spending - The part of the budget that works its way through the appropriations process of Congress each year and includes such programs as defense, veterans benefits, education, environmental, transportation and science. - Mandatory spending - Spending authorized by permanent laws that does not go through the same appropriations process as discretionary spending. Mandatory spending includes such programs as social security, Medicare, and interest on the national debt.

Modern Growth Theory

- Economic growth is driven primarily by new knowledge produced by technical change. o Public good characteristics of knowledge - research and development by one firm necessarily has positive spillovers on other production firms Just in time inventory Open source code

Macroeconomic Goals:

- Full employment Act of 1946 o Mandated a national goal of providing full employment to all people willing to work - Full employment and balanced growth act of 1978 o Directed the government to pursue policies designed to stimulate the economy and reduce inflation - How have these goals been met over the last few decades? o Unemployment and Inflation Rates (figure 2 page 366)

Full Employment

- Full employment cannot be zero unemployment rate since there will always be frictional and structural employment. - Minimizing cyclical employment may be the goal of policy makers.

Major Events that shaped Macroeconomic Ideas:

- Great Depression o $1,000 invest in the stock market in 1929 fell to $150 in 1933 o Massive Bank failures o Unemployment rates approaching 25%

Alexander Hamilton vs. Thomas Jefferson:

- Hamilton, Secretary of the Treasury in George Washington's administration, fought to establish a national bank and to allow the federal government to borrow funds. His goal was to establish a powerful government that would manage the economy and the money supply, promote industrialization, and finance public infrastructure such as roads and canals. - Thomas Jefferson viewed public debt as a serious threat to the country and proposed that a balanced budget amendment be added to the Constitution. - Two centuries later, American politicians are still divided into those who take Hamilton's view of deficit spending and those who follow in Jefferson's footsteps

Implementing Fiscal Policy:

- Implementing fiscal policy is complex and time consuming process. Three disparate groups - the Senate, the House, and the executive branch - must collectively agree on specific spending and tax policies.

Recessionary and Inflationary Gaps

- Keynesian analysis illustrated that what was needed to get the economy out of the Great Depression: an increase in aggregate spending. He argued that if consumers, businesses were unwilling to spend (their economic expectations were dismal), THEN GOVERNMENT SHOULD. o This was the rationale for the 2009 economic stimulus package passed by Congress and signed by President Obama.

Problems with Unemployment Statistics

- Measuring personal situations such as employment, unemployment and job seeking is complex - Commentators often note that the unemployment rate announced each month by the Department of Labor "understates" the unemployment rate, since discouraged workers who have dropped out of the labor force are not counted as unemployed

Macroeconomic equilibrium:

- Occurs at the intersection of the short-run aggregate supply and aggregate demand curves. At this output level, there are no net pressures on the economy to expand or contract. o The equilibrium can occur at less than full employment

Cost Push Inflation

- Occurs when a supply shock hits the economy, reducing the short-run aggregate supply, and thus reducing output and increasing the price level. o Skyrocketing oil prices due to the OPEC oil embargo impact all parts of the economy because oil is a basic input to many goods and services ... less so today.

Demand Pull Inflation

- Occurs when aggregate demand expands so much that equilibrium output exceeds full employment. Without a reduction in aggregate demand, the economy will move to a new equilibrium where prices are permanently hire. o U.S economy in the 1960 as the escalation in the Vietnam conflict fueled a rising economy

Components of the GDP

- Personal Consumption Expenditures - goods and services purchased by residents and businesses (70% of GDP) o Durable goods have an average life span of three years (Automobiles, Major Appliances, Books) o Nondurable goods include all other goods (Food, toothpaste, etc.) o Services are the largest category of consumption. Services are commodities which cannot be stored and are consumed at the time and place of purchase (legal, haircuts, etc.) - Gross Private Investment - fixed investments (residential/nonresidential structures), equipment, and software (10% of GDP) o Nonresidential structures is the largest component of Investment o Private investment is a key factor driving economic growth and an important determinant of swings in the business cycle - Government spending is now a relatively large component of GDP (20%) o Government = Federal, state and local o Entitlements are a key driver of government spending - Net Exports = exports - imports

Fiscal Policy and Aggregate Supply:

- Policies that focus on shifting the long-run aggregate supply curve to the right, expanding the economy with output increasing inflationary pressures. Unlike policies to increase aggregate demand, supply side policies take longer to have an impact on the economy. o Fiscal policies which allow the economy to expand: Investment in human capital (education) Development of new technologies Reducing tax rates Promotion of investment in new capital equipment, research and development, and trim regulations - High marginal tax rates can have an adverse effects on the economy. When marginal tax rates become too high, the incentives to work and for business to take on added risk can be harmed. o President Reagan reduced the top marginal rate form 50% to 28% and reduced tax deductions as well. - Unfortunately, the economic rationale has become clouded by a political dimensions because "supply side" economics became associated with a political movement in the 1980's o Laffer curve - plots hypothetical tax revenues at various tax rates

The Multiplier

- Spending changes alter equilibrium income by the spending change times the multiplier. One person's spending becomes another's income, and that second person spends some (the MPC, which becomes income for another person .... - Multiplier (K) = 1/(1-MPC) o Example MPC = .75 K = 1/(1 - .75) -- K = 4

The spending multiplier:

- Spending changes the equilibrium income by the spending change times the multiplier. One person's spending becomes another's income, and that second person spends some (Marginal Propensity to Consume - MPC), which becomes income for another person, and so on, until income has changed by 1/ (1-MPC) = 1/MPS. The multiplier works in both directions. o MPC - the change in consumption associated with a given change in income o MPS - the change in savings associated with a given change in income. - When the economy has many unemployed resources, and excess capacity, the price level will remain constant and output will increase by the full magnitude of the multiplier

Public Choice Theory:

- The economic analysis of public and political decision making. It looks at the following: o Relationship between voting and policy outcomes o The impact of election incentives on politicians o The influence of special interests groups o Rent-seeking behaviors (i.e. corporate welfare)

The Great Depression

- The great depression demonstrated that an economy can reach short run equilibrium at output levels below full employment o Investment fell by 80% from 1929 to 1933 o The drop in investment reduced spending, and therefore income and consumption, resulting in a deep depression o The increase in aggregate demand required to restore the economy back to 1929 levels was huge. It wasn't until spending ramped up for World War II that the country popped out of the depression.

Aggregate Demand

- The output of goods and services (real GDP) demanded at different price levels - The aggregate demand curve looks like the product demand curve. However, the two curves slope downward for different reasons.

Aggregate Supply

- The real GDP that firms will produce at varying price levels o In the short run, aggregate supply is positively sloped because many input costs are slow to change. At full employment the supply curve is vertical since the economy has reached its capacity to produce. Short Run Aggregate Supply curve (SRAS) • When prices rise, firms do not immediately see an increase in wages, or rents since these are often fixed for a specific time. Profits will rise and firms will supply more output. • As an entire industry or the economy as a whole increases its production, firms start hiring more labor or paying overtime. As each firm seeks more employees, wages are driven up, increasing costs and forces hiring prices. • For the economy as a whole, a rise in GDP results in higher employment (tightening of the labor markets). The result is that a short-run increase in GDP is usually accompanied by a rise in price level --- is this happening today?

Unemployment

- Unemployment rate has varied from a high of 25% during the Great Depression to a low of 1% during World War II. The rate has tended to hover around 5 - 6%. - Defining and measuring unemployment o Size of the labor force o Number of people employed o Number unemployed o Unemployment rate = unemployed/labor force

Fiscal Policy and Aggregate Demand:

- When an economy faces underutilization of resources because it is struck in equilibrium below full employment, increases in aggregate demand can move the economy toward full employment without generating excessive inflation pressures. - When an economy is in an inflationary equilibrium above full employment, contracting aggregate demand brings about other tradeoffs: decreasing output dampens inflation but leads to unemployment.

Long run economic growth: Productivity is the key

- When worker productivity grows, real wages rise o The primary reason why the American standard of living is so high is that American workers produce so much more per worker than do workers throughout the rest of the world Learning Curve/Pricing Curve o Many people in the developing world eke out a living using tools that would remind us of an earlier century. This lower productivity is reflected in their standard of living.

The consequences of Inflation

- Your attitude toward inflation depends upon whether you live on a fixed income, whether you are a creditor or debtor, and whether you have properly anticipated inflation o People on fixed income are harmed by inflation, since there purchasing power of their income declines o Creditors are harmed as the principal on the loans and interest payments are usually fixed. Inflation reduces the real value of the payments received o Debtors benefit, as the real value of their payments decline as their wages rise with inflation o Homeowners in the 1970s and 1980s Value of real estate rises Wages rising Mortgage payments fixed o Inflation redistributes income from the debtors to the creditors This is the case only if inflation is unanticipated. If lenders foresee inflation they will adjust interest rates (increase or add escalation clauses).

Adjusting for Inflation: Deflation

Deflating: Nominal vs. Real Values Example - GDP has grown by nearly 13% from 2005 to 2009. Is this growth real? Not quite, as inflation has eroded the purchasing power of that increase. How much did real GDP grow? - Real = Nominal X (Base Year Index/Current Year Index) o Base Year - 2005 o Base Year index = 100 o Current Year Nominal GDP = $14.242 Trillion o Current Year Index = 109.7 Real GDP = $12.9 Trillion = $14.2 Trillion X (100/109.7)

Adjusting for Inflation: Escalation

Escalator Clauses - many contracts (rental agreements, labor union contracts, and social security payments) are subject to escalator clauses. An escalator clause is designed to adjust payments or wages for changes in the price level. Social Security payments are adjusted every year to account for the rate of inflation - In times of low inflation escalator clauses have been used infrequently

- Gross debt

Gross Debt $18.2T o $7.6T Government Agencies + Federal Reserve o $6.0T externally held o $4.6T domestically held - mutual funds, individuals, etc. - Interest Payments Represent about 7% of the federal budget ($280B) o Interest paid on externally held debt represents a real claim on our goods and services

- Automatic Stabilizers

Tax revenues and transfer payments automatically expand or contract in ways that reduce the intensity of business fluctuations without any overt action by Congress or other policy makers. o The income tax is a powerful stabilizer because of its progressivity. When incomes fall, tax revenues fall faster since people pay taxes at a lower rate as their incomes fall.

- Say's law:

The act of production produces income that leads to an equivalent amount of consumption spending - Supply creates its own Demand. o It held that a general glut in goods and services was a logical impossibility because supply would be inevitable match by demand

Much of macroeconomic policy is focused on the short-term goal of near full employment with low inflation

This chapter focuses on the long-term economic growth and the conditions needed to sustain economic growth and improve standards of living. - Economic growth results from increases in the labor force and its productivity, increases in capital, and improvements in technology

Early Growth Theory - the classical model was based on the works of Adam Smith, Thomas Malthus, Alfred Marshall, Karl Marx

This model relied on competitive conditions in the labor market, and capital markets, and flexible prices, wages and interest rates to keep the economy operating in full employment. Anyone unemployed simply was unwilling to work at the prevailing real wage.

- James Buchanan

considered the father of public choice theory, assumed the politicians and bureaucrats consider their own self-interest when making public policy. o Driven by their own desire for reelection, politicians frequently cave in to pressure from special interest growths in way that magnify market imperfections. Public choice analysis suggests that government action should be limited o Public choice analysis argue that deficit spending reduces the perceived cost of current government operations. The result is that taxpayers permit some programs to exist that they would oppose if required to pay the full cost today. This situation amounts to shifting the cost of government to the next generation ... kick the can down the road to the Rollins Class of 2018.

- In times of economic turbulence

economists/politicians try to solve problems that, if not corrected, can bring massive hardship to millions of people.

- Expansionary fiscal policy

involves increasing government spending, increasing transfer payments or decreasing aggregate demand to expand output and the economy. o Aggregate demand curve will move up (to the right) o When an economy is at full employment, expansionary policies lead to no long term improvement in GDP - prices rise.

- Contractory fiscal policy

involves increasing withdrawals from the economy by reducing government spending, transfer payments or raising taxes to decrease aggregate demand to contract output and the economy. o Politicians are loath to support contractionary policies that control inflation by reducing aggregate demand since high unemployment can cost politicians their jobs. Politician often look to the Federal o Reserve to use its tools to keep inflation in check.

Deflation

is a decline in the overall prices throughout the economy Japan in the 1990s, Parts of Europe today

Inflation

is a general rise in prices throughout the economy. A rise in the CPI or the PPI is usually referred to as inflation.

Inflation

is a measure of changes in the cost of living

o Consumer Price Index (CPI)

is a measure of the average change in prices paid by urban consumers for a typical market basket of consumer goods and services.

o Producer Price Index (PPI)

is a measure of the average changes in the prices received by domestic producers for their output.

Disinflation

is a reduction in the rate of inflation. This happened after the recession of the early 1980s.

Hyperinflation

is an extremely high rate of inflation (anything above 100% per year).

o GDP deflator

is an index of the average prices for all goods and services in the economy (consumer, producer, government). It is the broadest measure of inflation

o Price Level

is the absolute level of a price index whether it is the Consumer Price Index (CPI - retail prices), the producer price index (PPI -wholesale prices), or the GDP deflator (average price of all items in the GDP)

- A surplus

is the amount by which annual tax revenues exceed government expenditures

- A deficit

is the amount of money by which annual government spending exceeds tax revenues

- The public debt

is the total accumulation of past deficits and surpluses

- The CPI

is used to calculate cost of living adjustments for many contracts and to calculate adjustments in social security payments and income tax rates - The CPI is calculated monthly based on the results of household surveys conducted by the bureau of labor statistics (BLS) - CPI = (cost in current period/cost in base period) X 100 o 110/100 x100 = 110 CPI has risen by 10%

- Stable Financial System

o A financial system which keeps purchasing power stable, facilitates transactions and permits credit institutions to arise o Unanticipated inflation or deflation are both detrimental to economic growth. If price signals are constantly being distorted by inflation or deflation, the quality of business and consumer decisions suffers.

- Problems in measuring Consumer Prices:

o CPI measures only private goods and services It does not take into account the state of the environment, homeland security, crime rates and other factors impacting the quality of life o CPI uses a fixed market basket determined by consumer expenditure surveys that are often 3-5 years old When the price of one good changes, consumers substitute other goods. To the extent that the CPI does not account for product substitution, it will overstate inflation o Adjusting the index to account for products that have undergone quality changes is difficult o Accounting for new products is even harder (cell phone, smart phone) o The current CPI only looks at consumers' out of pocket spending on health care. It does not track the changes in medical costs paid by Medicare, Medicaid or employer-financed health insurance.

GDP Equation

o GDP = C + I + G + (X -M) o GDP is not a "perfect" measurement. It is a good measure of economic activity in our economy: Ignores: Mowing your lawn vs. paying someone to do so. Includes: the "imputed value" of rent of owner occupied homes

- Episodes of Hyperinflation

o Germany in the 1920s, inflation crises in South America, Venezuela, Zimbabwe o Episodes of high inflation cripple economies by forcing people to spend much of their time coping with rapidly changing prices o Hyperinflation is associated with a rapid increase in the money supply, usually because government finance deficits by printing more and more money

- Budget Deficits

o Huge swings in federal budget deficits over the past 2 or 3 decades o Massive deficits in many developing countries or more recently Greece o Huge budget deficits must be financed by either borrowing from the public or printing money

- The multiplier works in both directions:

o If spending rises equilibrium income by the increase times the multiplier, a spending decrease will reduce income in a corresponding fashion ... $100 decline in investment or consumer spending will reduce income by $400 o In a recession consumers decide to increase their savings to guard against the possibility of job loss, they may make the recession worse as they pull more money out of the spending stream Consumer spending peaked in the summer of 2008. After that, auto sales plummeted and housing prices and sales fell. As consumers lost confidence in the economy, households began to save more, consumer spending declined further, and the economy sunk into a deeper recession • Leading up to the recession, savings were less than 1% of personal income, by mid- 2009 it had grown to 7% as households began to pay off debt that had soared prior to the recession

- Sources of Productivity Growth:

o Increasing the capital to labor ratio American farmers vs. Nigerian farmers As a rule, the more capital employed with workers, the greater their productivity and the higher their earnings o Growth in the labor force Immigration policies Women entering the labor force • Labor force participation rate jumped significantly o Increasing the Quality of the Labor force Investment in human capital - skills, knowledge and the quality of workers Universal public education, on the job training o Improvements in technology Henry Ford and the assembly line Thomas Edison and the light bulb, etc. Telecommunications industry and the Internet Biotechnology Industry

- Determinants of Short-run Aggregate Supply:

o Input Prices - Changes in the cost of land, labor or capital will change the output that firms are willing to provide to the market. Falling crude oil prices are reflected in lower gasoline prices. This is reflected in a downward movement along the existing SRAS curve. o Productivity - changes in productivity will shift the SRAS to the right. This is why changes in technology that increase productivity are so important to the economy. o Taxes and Regulations - rising taxes or increased regulation can shift the SARS to the left o Expectations - a change in business or inflationary expectations can also change the SARS curve. If firms perceive the business climate is declining, they may reduce investments in new capital equipment. This reduced investments results in reduced productivity, fewer new hires which can reduce aggregate supply in the short run.

- Definitions

o People are counted as employed if they have done any work at all for pay during the survey period o People are counted as unemployed if they do not have a job, and have been actively seeking work for the last 4 weeks. o Labor force is the total number of those employed and unemployed Labor force participation rate: Employed + Unemployed/ non institutionalized working age population

- Selling Bonds to the Federal Reserve

o The Federal Reserve exchanges cash for bonds by "printing money". This part of the debt is "monetized". o The bonds may be sold to the public Individuals, corporations, mutual funds, foreign governments • China is able to purchase a significant amount of bonds from the excess cash resulting from the significant trade surplus with the U.S.

- What could be wrong with Say's law:

o The Great Depression illustrated that high unemployment levels can last a long time o In reality, politicians who are responsible for economic policy face reelection every few years. They will often support policies to assure their reelection and are not as concerned with the long term effects of short term policies

- Determinants of Aggregate Demand:

o The aggregate demand curve is negatively sloped - a change in the price level will change the quantity demanded along the aggregate demand curve. o If one of the components (C + I + G + [x-m]) of aggregate spending changes, the aggregate demand curve will shift. Consumer Spending is affected by four major factors: wealth, consumer confidence (reference - monthly University of Michigan survey on consumer confidence), household debt and taxes Investment is determined by the expected rate of return on capital projects or acquisitions (i.e. should Boeing design a new narrow body jet to replace the 757? • Cost of Capital = Weighted cost of equity & debt • Payback period • Risk factor (market and execution risk) Government spending and Net Exports have essentially the same impact on aggregate economy as consumer and investment spending. When government spending or net exports rise, aggregate demand increases and vice versa.

- Economic Freedom

o Those nations with the most economic freedom also have the highest per capita GDP BRIC's - Brazil, Russia, India, China ... compare and contrast

- Transfers:

o Transfer payments are money payments directly paid to individuals. They include social security, unemployment compensation and welfare.

- Fiscal Policy Timing Lags:

o Using fiscal policy to smooth the short-term business cycle is a challenge because of several lags associated with the implementation. Information lag: the time policy makers wait for economic data to be collected, processed and reported. Recognition lag: the time it takes for policymakers to confirm that the economy is tending in or out of a recession. Decision lag: the time it takes Congress and the administration to decide on a policy once a problem is recognized. Implementation lag: the time required to turn fiscal policy into law and eventually have an impact on the economy.

- The Aggregate Demand Curve is negatively sloped for the following reasons:

o Wealth effect - when the aggregate price level rises (inflation), purchasing power is reduced, and some purchases are put on hold resulting in a decline in output demanded o Impact on Exports/Imports - when the American aggregate price level rises or the value of the dollar rises relative to other currencies, American goods become more expensive in the global market space (i.e. impact of the rising dollar on the steel industry). Higher prices mean our goods are less competitive with goods made in other countries. As a result foreign products are substituted for American products and the quantity demanded of domestically produced products declines (decline in Gross DOMESTIC Product). o Interest Rate effects - as people demand more money, the cost of borrowing money - interest rates - will go up. Rising interest rates mean reduced business investment, which will result in a drop in quantity demanded for real GDP. It appears that the Federal Reserve will raise interest rates on federal funds in June which will eventually increase rates throughout the economy.

- Changes in Taxes has less of a direct impact on income, employment, and output than an equivalent change in government spending.

o Why - consumers pay a tax increase in part, by reducing their savings. If taxes are increased by $100 and they withdraw $25 from savings, only $75 in reduced spending get multiplied. The reduction in savings of $25 dampens the effect of the tax on equilibrium income because the amount withdrawn from savings had been previously removed from the spending stream. o A tax increase or decrease has less direct impact on income, employment and output than an equivalent change in government spending. This is why the 2009 $787 billion stimulus package was more heavily structured toward spending.

Macroeconomics

studies economic activity from the broadest of perspectives, that of the entire economy. This includes - Economic growth - Output of the economy (GDP) - Inflation rates - Employment/unemployment/labor force participation - Interest rates

o Marginal propensity to consume (MPC)

the change in consumption associated with a given change in income

o Marginal propensity to save (MPS)

the change in savings associated with a given change in income

- Functional Finance

the first priority of policymakers should be to keep the economy at full employment with stable prices. The government's primary microeconomic job is to provide those public goods and services that citizens want.o National defense, stable legal environment and many other goods and services we take for granted This last item "many other goods and services we take for granted" is a subject of debate between the political parties.

- Recessionary Gap

the increase in spending needed to bring the a depressed economy back to full employment; equal to the GDP gap divided by the multiplier

- Inflationary Gap

the spending reduction necessary to bring an overheated economy back to full employment