Macroecon

Simple spending multipler model

(1/1-MPC) = (1/MPS)

Fiscal Policy: The Great Recession

- After peaking in December 2007, the U.S. economy entered a recession, precipitated by declining home prices, and rising foreclosure rates, and borrowers failed to make their mortgage payments -September 2008: Lehman brothers, the nations fourth largest investment bank with assets of over 600billion and 25,000 employees, filed for what became the largest bankruptcy in U.S. history -A.I.G.- 1.2 trillion insurance giant, was bailed out - October 2008: TARP: Troubled Asset Relief Program (bailouts) -TARP helped calm credit markets, but the economy and stock market continued to fall - In the 4th quarter of 2008, the real GDP fell 8.9%(largest drop in decades) - By the end of 2008, the unemployment rate 5.0 to 7.4% -Recovery and Reinvestment Act, Feb 17, 2009- 787 billion dollars of tac benefits and spending programs aimed at stimulated aggregate demand -Later, the package rose to $831 billion or $7,000 per household - Banks subjected to the "Stress test" administered by the treasury - some had a limited time to negotiate for more a asset infection(support) - FDIC closed 465 banks from 2008-2012 -$250,000 Deposit insurance - Failures: - the acquisition of Wachovia by ] was completed on Dec 31,2008, after a government forced sale to avoid Wachovias failure. the Wachovia brand was absorbed into the Wells Fargo brand in a process that lasted 3 years on Oct 15,2011, the last Wachovia branches in North Carolina were converted to Wells Fargo

1980s: The Supply Experiment

- president:23% tax cut - Government spending (7.1% to 6.3%) - the stimulus from the tax cut helped sustain a continued expansion during the 1980s (the longest peacetime expansion to that point in the nations history) -the national debt strongly increased

John Maynard Keynes

- prices and wages inflexible in a downward direction, natural market forces were not correcting the situation - even with lower interest rates, bleak business expectations (too conservative)

Gloden Age Stagflation

-1960s: golden age of Keynesian Economics President Kennedy: proposed a federal budget deficit (🚀) -Mid 1960s: President Johnson cut taxes

President Obama: January 2009

-Issued another tax cut - intervened more directly in the economy -asked some industrial leaders/CEOs to resign in order for their companies to get federal aid -"days of the million dollar bonuses are over" -response: "the best and the brightest" -Dodge/Chrysler declared bankruptcy -GM and Opel -Housing market/new starts-flatlined(2012/2014) foreclosures -Retail, restaurants, entertainment suffered -the stimulus package was all deficit spending -Analysis: permanent tax cuts seem to have more of an impact of the economy as opposed to spending increases -the stimulus package remains controversial and unpopular -Government purchases grew, but GDP fell to 0.7% -between 07-09, employment declined by 6.15 -Over the next three years, the economy added back about half of those jobs - Federal deficit ran from $161 billion in 2007, to 259 billion in 08, to 1.4 trillion in 09 -Deficits topped $1.0 trillion for each of the next 3 years -Congress and the president also adopted some modest stimulus programs such as tax incentives for home buyers and car buyers

Basic Research vs. Scientific Research

-Knowledge is created through research - genreal knowledge is a public good

trump 2016

-Obama health care act (2009/2010) -2016- trump wins election -20 million more have access to health care -produces a significant tac cut for business and tax payers (35 to 21%) -$200,000-450,000 33-35% -economy seems to be recovering - low unemployment, more jobs being filled, pay beginning to pick up -stock market- big highs and several big lows (meaning unclear) - investment seems to be rebounding -new emphasis on rebuilding the infrastructure -resturants/retail, etc. still struggling and downsizing -immigration/healthcare

The Evolution of Fiscal Policy

-Prior to the 1930s: discretionary fiscal policy was seldom used as an instrument of macroeconomic policy -1929: stock market crash -1930 and beyond: the great depression: at its height, 25% of the working population was unemployed (1933 exactly) - although employment dropped, the "invisible hand" was no where to be found -1936: John Maynard Keynes (U.K.), the general theory of employment interest and money

Temporary Assistance for Needy Families (TANF)

-Provides a small income for some poor families -Provides food stamps, sponsors housing programs, sponsored by the government ; paid by through taxes -debate over the role of government

The Tragedy of the Commons

-Sheep grazing the commons. Impact. -Modern Tragedy of the Commons: clean air and water, congested roads, fish, whales, and other wildlife -When an absence of property rights causes a market failure, the government can potentially solve the problem

Forged Currency

-The $100 is the most forged currency, fakes are most printed in North Korea and Columbia -Most forged bill in U.S. is the $20

Bailing out AIG: responses to the Financial Crisis

-The fed purchased some of AIG's troubled assets, taking them off the balance sheet -Fed and treasury lent AIG money to keep it running -AIG survived -Critics: Believed they shouldn't have been bailed out -Chairman Bernanke:the fed trie dot protect U.S. workers -Chairman Bernanke: the feds investments that seemed like bailouts -Reducing the risk of "Too big to fail" -objective regulations: to reduce the probability that a large financial institution will collapse -but if one of these financial giants should get into serious trouble>>> let it fail through an orderly liquidation of the firms assets -the Fed and FDIC have set out rules for so called living wills -requiring each large financial institution to prepare

Positive Externality (production)

-Third party benefits from the production of a good, ex: building a train station provides shelter for homeless when its raining -If a company develops new technology, can be implemented by other firms who will gain a boost in productivity -Time Bernes lee developed World wide web, made it freely available, creating a very large positive externality.

Diagram of positive externality in production

-bc there are positive externalities in production, the social marginal cost of production is LESS than the private marginal cost of production -in a free market a firm will ignore benefits to third parties and will produce at Q1 (free market outcome) -the socially efficient level will be at Q2 (where social marginal cost = social marginal benefit)

The birth of the FED

-before 1863, banks were chartered by the states in which they operated, thus known as "state banks" -Each bank issued notes and they were redeemable for gold. -The national banking act of 1863 and later amendments created anew system of federal chartered banks called national banks -they issues notes -they were regulated by the comptroller of the currency -state notes taxed out of existence - 19th century: panic runs on banks -1907: knickerbocker trust company (NYC) failed This all led to the creation of the federal reserve system in 1913

CARS act

-consumers assistance to recycle and save act -cash for clunkers appropriated $1 bullion to pay from 3500 to 4500 to each car buyer who traded a clunker -congress put 2 billion into pot -680,000 new vehicles - overwhelming m majority of those car sales, would have occurred anyway during the last year -3 billion spent on the program -money govt didnt have -decreased federal deficit -Japanese manufactures :41% of sales -the big 3; 39% of sales -automakers had already received 83 billion in bailouts;25 billion of which will never be repaid -because 680,000 cars had to be destroyed, it removed the same number from the used car market-where low income households tend to buy cars from -argued, according to polls, that this program was unpopular with the public as well -in late 2012, unemployment remained above 8.0%

Federal Reseve System

-created in 1913 - the central bank and monetary authority of the US - All banks joined the FED(except state banks) -it now issued all notes -OTHER POWERS -to buy and sell government securities -to extend loans to member banks -to clear checks -to require that member banks hold reserves equal at least some specific fraction of deposits -reserve banks hold deposits of member banks and extend loans to member banks

Diagream shwoing marginal social costs

-for goods with negative externalities the social cost is greater than the private cost -in a free trade market if people ignore the external costs, the equilibrium will be at output 20. but social efficiency (where social marginal cost = social marginal benefit) would be at output 16 -A tax can 'internalize the externality'

Automatic Stablizers

-smooths out fluctuations in disposable income over the business cycle, thereby stimulating aggregate demand during recessions and dampening aggregate demand during expansions - GDP fluctuates less than it otherwise would -disposable income varies proportionately less than does GDP -Consumption also fluctuates less than GDP

Objectives of the FED

1. a high level of employment in the economy 2. economic growth 3. price stability 4. interest rate stability 5. financial market stability 6. exchange rate stability

3 Developments bolserted the use of discretionary fiscal policy in the US

1. with the economy operating below its potential, the government needed to increase aggregate demand to boost output and employment 2. WWII - lifted US out of the depression 3. Employment Act of 1946 - gave the federal government responsibility for promoting full employment and price

Banking During the Great Depression

1913-1929: Fed performed up to expectations 1930-33: Fed practiced conservative monetary policies. 1/3 of Banks failed [Lender of Last Resort] 1933: FDR "Banking Holiday"

Open market operations

2 types

GPD growth

2014: 2.7% 2015: 2.0% 2016: 1.88% 2017: 2.47% 2018: 3.0% 2019: 2.3% 2020: -3.5%

1972- Merrill Lynch Money Market Mutual Fund

A collection of short-term interest-earning assets purchased with funds collected from many share-holders. (Limited check writing privileges)

bank holding company

A corporation that owns banks National banks are the wave of the future. Merger upon merger taking place -They have reduced the number of banks, but increased the branches -before 2000, you had to be credit-worthy, to get a home mortgage -New century- new statistical methods/computers would increase a lenders ability to assess the risk of a subprime mortgage(not so good credit rating) - The higher the likelihood of a default, the higher the interest rate you paid -Hundreds of mortgages were then bundled together based on credit scores into a mortgage backed security. this was a blending of mortgages . (more sub prime loans, more risk- but potentially higher returns) -by 2007, the subprime market was. trillion dollar industry -federal regulators pressured some financial institutions into lending to groups that were underserved -subprime loans increased the demand for housing and prices went up- fueling a boom for subprime loans - mortgage backed securities were sold around the world -between 2006-2008, houding prices plunged 22% -borrows began to owe more money than the house was now worth' -payments stopped, defaults picked up, and this led to million of fore clousure

Contractionary fiscal policy

A decrease in government purchases, increase in net taxes, or some combination of the two aimed at reducing aggregate demand enough to return the economy to potential output without worsening inflation; policy used to close an expansionary gap.

Invisible Hand

A phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all

Aggregate Expenditure Line

A relationship tracing, for a given price level, spending at each level of income, or real GDP, hte total of C+I+G+(X-M) at each level of income, or real GDP

expansionary fiscal policy

An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output thereby reducing unemployment policy used to close a contractionary gap

Depostiory Insitutions

Commercial banks and thrift. institutions; financial institutions that accept deposits from the public

Positive externalites

Education- better workers, higher wages, and more positive externalities,- more informed voters, lower crime rates, better users of technology -When consumption or production of a good causes a benefit to a third party -social benefit- when the benefit to society is greater than your personal benefit (social benefit>private benefit)

quantitative easing

Feds purchase of long-term assets (govt bongs and mortgage-backed securities) -Aggressive purchases since late 2008: the Fed added over 3 trillion in assets to its balance sheet -Risks: Fed could've lost money on assets, if these assets are sold back for less

Reserves

Funds that banks use to satisfy the cash demands of their customers and the reserve requirements of the FED; reserves consist of cash held by banks plus deposits at the FED. Reserve banks were also authorize to lend to banks in need of reserves; the interest rate charged is called the discount rate -any profit additional profit earned by the reserve banks is turned over to the U.S. treasury

Externalities

Government action is sometimes necessary to improve upon market outcomes 1.why do some markets fail to allocate resources efficiently? 2.how can govt policies improve market allocation? 3. what kind of policies work best -Negative externality: adverse impact Example: aluminum, for each unit of aluminum produced the social costs includes the private costs of the aluminum producers, plus the cost to those affected adversely by the pollution -Positive externality: beneficial impact

1970s Stagfaltion

High unemployment, high inflation resulting from a decrease in aggregate supply( crop failure, oil shocks, war costs) Demand management polices were not working

Short-run

In macroeconomics, a period during which some resource prices, especially those of labor, are fixed by explicit or implicit agreements

Long Run

In macroeconomics, a period during which wage contracts and resource price agreements can be renegotiated; there are no surprises about the economy's actual price level

banking deregulation

In response to a decline in deposits and investment limitations, Congress tried to modernize regulation, giving banks more discretion in their operations. -Money market deposit accounts deposits jumped from 8 billion in 1978 to 200 bill in 1982 -deposit insurance, unregulated interest rates, and more flexibility in what assets savings banks could purchase allowed them to compete for large deposit in national markets (savings banks had been restricted to residential lending) - bigger risks ensued;this created a Moral Hazard - Banks engaged in irresponsible lending, particular to real estates developers -1989- congress approves the largest financial bailout of any U.S. industry - eventually costing $180 billion (taxpayers paid most of the bill) - bad banks closed, insure depositors payed off, deposits moved to healthier banks -between the early 1980s and early 1990s, 3,000 banks failed -ban expansion rules/investment options changed

Scientific (Applied) Research

Is designed to answer specific questions, aimed at solving problems... often leading to an invention

National Institutes of Health

Medical research

1989-1993

President Busch, S&L prices(savings and loans)

Income - Expenditure Model

Shows how much people plan to spend at each income level, identifies for each given price level, where the amount people plan to spend=the amount produced in the economy

Example of social cost

Smoking: if you smoke the private cost is $6 for a packet of 20 cigs, but there are external costs to society: air pollution, litter, health costs -the social costs of smoking included the total of all private and external costs

Late summer 2008:

Sub-prime loans - tied to Freddie Mack and Fannie May, AIG, and numerous banks began to fail along with these institutions. The ramifications were worldwide

Federal Open Market Committee (FOMC)

The 12-member group that makes decisions about the open-market operations- purchases and sales of U.S. government securities by the FED that affect the money supply and interest rates; consists of the 7 Board governors plus 5 of the 12 presidents of the reserve banks.

Open market purchase

The purchase of U.S. government bonds by the FED to increase the money supply

Simple Tax Multiplier

The ratio of a change in real GDP demanded to the initial change in autonomous net taxes that brought it about; the numerical value of the simple tax multiplier is -MPC/(1-MPC)

Simple Spending Multipler

The ratio of a change in real GDP demanded to the initial change in the spending that brought it about; the numerical value of the simple spending multiplier is 1(1-MPC);called "simple" because only consumption varies with income (1/1-MPC)=(1/MPS)

Basic Research

The search for knowledge; research into something without the intent for creating or inventing something

Nominal Wages

The wage measured in dollars of the year in question; the dollar amount on the paycheck

Bank Branches

a bank's additional offices that carry out banking operations

Short run aggregate supply (SRAS) curve

a curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied in the short run (otc) including the expected price level

Discretionary Fiscal Policy

a demand management policy; the objective is to increase or decrease aggregate demand to smooth economic fluctuations

In terms of consumption and investment

a great deal fo the money was channeled back into the economy

classical economists

a group of 18th and 19th century economists who believed that economic downturns were short-run phenomena that corrected themselves through natural market forces; thus, they believed the economy was self-correcting and needed no government intervention

Cost Benefit Analysis

a study that compares the costs and benefits to society of providing a public good Ex: building a highway -public vs. private goods - congestion, tolls, transponders

Long-run aggregate supply curve

a vertical line at the economy's potential output; aggregate supply when there are no surprises about the price level and all resource contracts can be renegotiated

Internalizing the externally

altering incentives so that people take account of the external effects of their actions

Commercial Banks

depository institutions that historically make short-term loans primarily to businesses

Overall impact of fiscal policy

don't worry about a balanced budget, promote full employment and price stability

Unemployment Insurance

during economic expansion, the system automatically increases the flow of unemployment insurance taxes from the income stream into the unemployment insurance fund, moderating aggregate demand

Progressive Income Tax

during economic expansions and recession

XMC

external marginal costs

Finacnial intermediares

institutions that serve as go-betweens, accepting funds from savers and lending them to borrowers

If spending > real GDP

inventory reductions, increase production, employment, income, and spending

mortgage-backed securities

known as troubled assets, values fell sharply -world financial panic set in -major investment bank, Lehman brother collapsed -credit dried up -consumers cut spending/consumption because of falling home prices, mounting job losses and a collapsing stock market -TARP=troubled asset relief

PMC

private marginal costs

open market operations

purchase and sale of government securities by the federal reserve in an effort to influence the money supply.

Banking Acts of 1933 and 1935

regulated the banking system and centralized power with the FED

The Board of Governors

responsible for setting and implementing the nations monetary policy -12 reserve banks moved under the board of governors(7 members appointed by the president and confirmed by the senate) -each member serves a 14 year nonrenewable term (staggered appointed; one very two year)(designed to protect the board form political pressure) -one governor is pointed to chair the board of governors-a four year renewable term

Thrift Institutions (Thrifts)

savings banks and credit unions; depository institutions that historically lent money to households

Social costs

social cost is the total cost to society. it included private cots + any external costs EX: driving to work -costs of things for petrol (personal costs) -cost of increased congestion(external cost) -pollution and worse air quality(external costs) -the social costs included all of above (petrol + congestion + pollution)

social costs

social costs are private cots borne by individuals directly involved in a transaction together with the external costs borne by third parties not directly involved in the transaction

SMC

social marginal costs

Automatic Stablizers

structural features of government spending and taxation that reduce fluctuations in disposable income and thus consumption, over the business cycle

National science foundation

subsidize basic research in medicine, math, physics, chemistry, biology, and economics

President Clinton: 1993

substantially increased taxes on high income households

Rational choice theory

suggests individuals will only consider their private costs. for example, if deciding how to travel, we will consider the cost of petrol and time taken to drive. However we wont take into consideration the impact on the environment or congestion level for other members in society

Says Law

supply creates demand (french economist JD Says)

Expansionary Gap (+)

the amount by which actual output in the short run exceeds the economy's potential output

Recessionary (Contractionary) Gap (-)

the amount by which actual output in the short run falls short of the economy's potential output

Discretionary Fiscal Policy

the deliberate manipulation of government purchases, taxation, and transfer payments to promote macroeconomic goals, such as full employment, price stability and economic growth

Potential Output

the economy's maximum sustainable output, given the supply of resources, technology, and know-how, the rules of the game; the output level when there are no surprises about the price level

Long run equilibrium

the price level and real GDP that occurs when (1) the actual price level equals the expected price level, (2) real GDP supplied equals potential output, and (3) real GDP supplied equals real GDP demanded

Short Run Equilibrium

the price level and real GDP that result when the aggregate demand curve intersects the short-run aggregate supply curve

Aggregate supply

the relationship between the economy's price level and the amount of output firms are willing and able to supply (o.t.c) labor is the most important resource, accounting for about 70% of production costs

open market sale

the sale of US government bonds by the FED to reduce the money supply

Hysteresis

the theory that the natural rate of unemployment depends in part on the recent history of unemployment, a long period of high unemployment can increase the natural rate of unemployment

natural rate of unemployment

the unemployment rate when the economy produces its potential output

Real wages

the wage measured in dollars of constant purchasing power, the wage measured in terms of the quantity of goods and services it buys

Downward economic turns

transfer payments increase

supply shocks

unexpected events that affect aggregate supply, sometimes only temporarily

beneficial supply shocks

unexpected events that increase aggregate supply, sometimes only temporarily

Adverse Supply Shock

unexpected events that reduce aggregate supply, sometimes only temporarily

If real GDP > spending

unsold goods: unplanned inventory buildups decrease production, employment, income, spending