ECON 104 final

Chapter 12

An expansionary monetary policy is appropriate during recession. Increase the money supply, reduced interest rates, and increase investment. A contractionary monetary policy happened when the economy is overheating. Aims to reduce the money supply, increase interest rates, and decrease investment. 8 steps to contractionary monetary policy. 1 fed sell securities, - monetary base drinks, 3 excess reserves shrink, for banks makes you were alone, 5 money supply shrinks, 6 interest rates rise, 7 investment to client's, 8 ever get the man falls. Expansionary monetary policy steps: 1 the Fed by securities on open market, - when the Fed by securities this increases monetary base, 3 when the Fed by security is bank excess reserves increase, for the rise in excess reserves leads to banks to make more loans, 51 banks makes new loans this increases the supply of money, 6 you spending money supply drive down the interest rate, 7 lower interest rates leave businesses to increase investments, 8 when business investment increases this increases aggregate demand. Canes argued that an expansionary monetary policy would fail at two points, first during a recession banks would be unlikely to use additional excess reserves to make new loans, - even if the Fed could lower interest rates, lower interest rates would not draw with new business investments during a recession. The heart of quantity theory of money is the equation of exchange: money supply times velocity of money equals price level times real GDP. The prediction of the quantity theory depends on how quickly does a dollar stay in your checking account. Average number of times a dollar is spent over the course of the year. Classical monetary theory views the velocity of money as being very stable in the short run. The most important institutional factors for influencing the velocity of money are in the timing of payments to factors of production, and the cost of converting near monies to medium of exchange money. The timing of payment matters because it affects average money holdings. The cost of converting your monies to medium of exchange money matters because it also affects average money holdings.

Chapter 13

Economist ignore the aggregate supply curve because they view it as being constant in the long run and quickly self-adjusting in the short run for classical period can be an economist tend to ignore the aggregate supply curve because Kenzie himself ignored it. They can foster economic growth and reduce inflation at the same time. The original Phillips curve shows the relationship between wage inflation and unemployment and individual labor markets. Because behavior is influenced by after tax returns I want to changes in tax policy can call shifts in the aggregate supply curve. Changes in tax policy affect the net price for resources. The average tax rate is total tax paid / gross income. People's behavior is affected by marginal tax rate. The relationship between marginal tax rates and total tax receipt is called the Laffer curve. Higher marginal tax rates will lead to less labor being supplied. Very high marginal tax rates can discourage work altogether. Means-tested welfare programs have to general features: 1 they provide some bass level of support, - there is a phase out rate for support. The problem with this approach is Colin if the phase-out rate is sent to low then support payments will go to the wrong person, and if the phase-out rate is set hai it imposes a very high marginal tax rate.

Chapter 9

Fiscal policy is government action taken to counteract the business cycle. Give a boost to a faltering economy and to restrain a boom economy. Fiscal policy helps keep the economy operating closer to potential GDP. Involves changing government expenditures, changing tax receipts, or change in government transfer payments. Government expenditures are the goods and services purchased by the government. Examples are government purchases from the private sector, workers at the government hires itself, infrastructure built by the government itself. Tax receipts come from income taxes, Social Security taxes, excise taxes, import taxes, and from Steve. Transfer payments are fun simply given by the government to individuals or groups. During recession, and expansionary fiscal policy is appropriate. Increasing government expenditures, reducing tax receipts, and increasing transfer payments. The recessionary GDP gap is the amount by which current GDP is below potential GDP. A recognition leg and administration leg and an operational I are the three types of legs for carrying out the school policy. Recognition leg is the time it takes for policymakers to identify that a fiscal policy action is needed. Administration leg is the time it takes for policymakers to device an appropriate fiscal policy and to hammer out the details of that policy. Operational leg is a time it takes for an approved fiscal policy action to be implemented and to take effect. Recognition lag can be shortened by using leading economic indicators to make predictions about future economic conditions. Operational leg can be shortened by advancing planning and be careful selection of spending targets. Administration lie can be shortened by congressional agreement to fast track fiscal policy. Automatic stabilizers are fiscal policy tools that are not subject to the labs that afflict discretionary fiscal policy. Do not eliminate swings in the business cycle nor do they reverse swing.

Chapter 10

Four major steps in the federal budget process: 1 the president developed a proposed budget, to Congress modifies the proposed budget, 3 the president signs are because each budget bill, for federal agencies then spend money and collect taxes. To wave the deficit can get larger: 1 higher government funding will increase the size of the deficit to lower tax receipts will increase the size of the deficit. Crowding out occurs in the market for loanable funds. The government budget deficit also has an impact on the Foreign Trade Center. A rise in imports leads to a fall in net exports. The rise in interest rates makes you a security is more attracted to foreigners, therefore this increases the value of the dollar in foreign markets. Yeah I'd be ******** will reduce consumption now to support higher taxes in the future is called Ricardian equivalents.

Chapter 8

The distinction between planned investment and actual investment is critical. Recessions are the result of insufficient aggregate demand. The remedy is to increase spending. Three broad schools of macroeconomic thought: classical Keynesian and monetary ism. Classical applies much more effort to the development of macroeconomic issues. Keynesian shifting the focus of macroeconomics some aggregate supply to aggregate demand. Monetary ism concentrates on the financial side of the economy. They disagree in three important ways. One, on the extent and type of interaction between the real and financial sides of the economy. Financial variables can not affect the real side of the economy. Increasing the money supply only causes inflation. Keynesian Increasing the money supply leads to an increase in aggregate demand. Monetarist school while increasing the money supply can cause inflation decreasing the money supply can cause a recession. Too, on the extent and speed with which economy self adjust back to potential GDP. Classical: economy quickly and reliably self adjust back to potential GDP. Keynesian self-assessment back to potential GDP if it occurs at all is very slow. Monetary astronomy will quickly adjust back to the potential GDP, unless there is an insufficient supply of money. 3, on what the government can do and should do to influence macroeconomic equilibrium. Classical: government cannot influence macroeconomic equilibrium tries to change this all they do is create inflation. Keynesian: act to influence macroeconomic equilibrium, because the economy can't do it itself. Monetarist: should not try to influence macaroni conomic equilibrium attempts to do so are likely to backfire and make things worse. Classical model: the price level is determined solely by financial variables, real GDP is determined solely by real variables. Recessions are viewed as a normal part of the adjustment back to equilibrium. Keynesian: when there is a slack demand in labor markets the demand / supply model predicts that wage rates will fall to restore equilibrium in labor markets, however reluctant to reduce wage rates often choosing to lay off some employees rather than cut wages for all employees. It means this equilibrium can persist in labor markets, it means aggregate supply will not adjust to bring the economy back to equilibrium at potential GDO .Keynes argued forcibly that government deficit spending during a recession is a good thing. Keynesian models concentrate on changes to aggregate demand. Kings view the aggregate demand supply curve as basically stable. The aggregate supply curve will shift down with only a small amount during a recession. Out of recession it is necessary to increase aggregate demand. Aggregate demand represents the total amount of goods and services. Aggregate expenditures represents the total amount of goods and services purchased. Aggregate production must always equal aggregate expenditures. Production generates income which can only be spent on those goods and services that have been produce. Says law: supply creates its own demand. Income to workers finances expenditures by households which is revenue to businesses financing their purchases of resources used to produce the goods and services that are brought by households. Supply can be out of sync with demand. AE=C+I+G+NE. Consumption depends upon the level of disposable income available to households. Planned investment depends upon the real interest rate. Government expenditures depend upon the decisions of government policy makers. Exports depend upon the decisions of foreign consumers. The Keynesian model is an equilibrium when aggregate expenditures equal aggregate demand. Labor markets broken down to skilled labor and unskilled labor. Business firms broken down to agriculture, manufacturing, and services. Government activity broken down to goods and services, taxes, and transfer payments. Imports and exports can be broken down to financial goods and import resources. Total consumption is the sum of autonomous consumption plus marginal propensity to consume. Disposable income equals personal income - personal taxes. Disposable income equals total income available to households. Total consumption equals autonomous consumption plus induced consumption. Autonomous consumption is the amount that would be spent if there was your disposable income. Induced consumption is the amount spent out of received income.TC=AC+MPC×DI. Savings equals total consumption - disposable income. Saving is zero when consumption equals disposable income. Investment expenditure is it consists of new construction and improvements to existing structures, purchases of new production machinery, equipment, furniture, vehicles, computers software, changes in private inventories. When the cost of investing goes up the quantity of investment demanded goes down this is simply the law of demand in action. Planned investment is spending on structures and equipment plus intended changes in business inventories. Actual investment is spending on structures and equipment + actual changes in the inventory. Actual inventory changes are affected by how closely actual sales much expected sales. Government effects aggregate expenditures and three ways: government purchases of goods and services, government taxes reduce the level of disposable income available two households, government transfer payments increase the level of disposable income available to household. Government expenditures are determined by factors outside of Cannes macromodel. Government expenditures are exogenous is because he wanted government to be an active agent in his model. Be models exports as a constant not influenced by any other variables in this model. Keynes does model imports as being determined by disposable income. Net exports are also determined by disposable income. Net exports are zero wind exports equal imports. Independent variables are disposable income in interest rates and Keynesian models. Mackenzie and model is dynamic it takes time for consequences of a change to work. A static macromodel provides a snapshot of the economy and a particular point in time. A dynamic macromodel walk through step by step through the process by which the economy shifts between it's starting and ending point. One time change in any component of aggregate expenditures is not the end of the story rather it sets off a chain reaction that multiplies the effect of the original change, this is called multiplier. Equilibrium is when aggregate production equals aggregate expenditures. Recessions are the result of a fall in any of the components of aggregate expenditures. Getting out of a recession is for government to increase its own spending. Consumption and investment will then also start to rise.

Chapter 11

The main function of money is to serve as a medium of exchange. Other functions are store of value and unit of account. Fiat money and commodity money. Fiat money has little or no intrinsic value this is good for nothing except to spend on money. Come on dating money has value uses other than extending as money like gold and silver. Good money is portable, durable, divisible, standardized, hard to counterfeit. Two major measures of the money supply on m1 and m2. And one is stock of money immediately available for use as a medium of exchange period four components of m1 our currency in circulation, travelers checks, demand deposits, other checkable deposits. MT is a broader measure of money it includes and one and also saving deposits, time deposits, money market deposits of individuals. Demand for money increases when the price level rises. Assets equal reserves, loan, security, physical capital. Liabilities equal deposits, borrowings, bank capital. Three things happened to the bank balance sheet: 1 the bank right off the value of the loan, to the bank takes over collateral on the loan, 3 bank capital declines by the amount of the defaulted loan - the value of the collateral. The Federal Reserve System has three major components: 1 Board of Governors, o12 Federal Reserve Banks, 3 Federal Open Market Committee.

Chapter 14

You Rick said one the rate of growth in the world population has been increasing, and we are going to reach the point of limited resources. To the world's resources to support this population are limited. 3 uncheck population growth will overwhelm the world's resources and lead to disaster on an unprecedented scale. You lurics has done two things differently: documents the observed rate of population growth and expand beyond food production to argue that the environment of a hole put the check on human population. You are wrong on two counts: first, they assume that technology will remain constant, secondly you were ignoring market adjustment to changing conditions.