Macroeconomics Final

How does national debt and interest on debt compare to size of economy?

1. Government spends and borrows 2. Government competes with private borrowers 3. Interest rates rise 4. Consumers and businesses spending decreases 5. AD and Read GDP increase dampened

Federal budget process

1. presidential budget submission to congress by feb1 fiscal year (oct 1 to sep 30) 2. Budget resolution: congress looks over and revises it and submits their revised version in may 3. Budget passed-- debate it during summer discussed in committees with compromise talk and their is more debate and hopefully passed where the president signs it in September

What is the difference between absolute and comparative advantage?

A country is said to have an ABSOLUTE advantage if it can produce a good (or service) using the same or fewer resources as another country. A country is said to have a COMPARATIVE advantage when it can produce a good (or service) at a lower opportunity cost than another.

What is money?

Anything that can be used as: A Medium of Exchange: Perhaps the most important function of money is to act as a means whereby goods can be exchanged. It must be widely accepted as a means of exchange. A Unit of Account: As a unit of account, money allows us to assess the relative value of two goods or services. A Store of Value: The ability to hold value over time (only a small amount of value is lost through inflation).

What is the shape of the demand curve for money and why?

As interest rates fall, there is a higher demand for money, and as interest rates rise, there is less of a demand for money. That suggests an inverse relationship (a negative slope), which is typical of demand curves. Interst rate is the Y Quaninty of money demanded is the X ITS A CURVE

Exchange rates and how they work

Japanese price level rises goes to Japanese buying more US exports goes to the increase in the demand for the dollar goes to the value of the dollar rises (dollar appreciates) Japanese price level rises goes to the US citizens buy fewer Japanese imports goes to the decrease in the supply of dollars goes to the value of the dollar rises (dollar appreciates)

Compare and contrast Keynesian demand VS Supply side

Keynesian: Demand side Increase in Gov spending, decrease in net tax to Increase in AD curve (increases the demand) Supply Side: Suggests that the government has a responsibility to actively manage that the AS curve so that it shifts cut and to the right Decrease in resource prices technological advances, subsidies; decrease regulations and that leads to an increase in the AS curve

How can the fed affect the size of money supply?

To increase the money supply, we will have to increase the deposits at all institutions. And that only works when the bank in question is a Federal Reserve Bank. The Fed conducted open market operations in order to increase the money supply by purchasing $100,000 in government securities. PUBLIC money goes to the BANKS DECREASE LOANS AND DESTROY MONEY $$ goes to the FED SELLS GOV SECURITIES AND BANKS LOSE RESERVES FED BUYS GOV SECRURITIES AND BANKS GAIN RESERVES $$ goes to the BANKS INCREASE LOANS AND CREATE MONEY $$ goes to the PUBLIC

What is the Smoot-Hawley Tariff?

In 1930, the world was beginning to fall into an economic depression. Herbert Hoover was inaugurated in 1929. He campaigned to revise the tariff system in the US. Congress started with farm goods. Their tariffs were particularly small. Some industrial goods had particularly high tariffs. What started off as an attempt to normalize tariffs ended up only raising all tariffs. INSTEAD OF FINDING A MEDIUM IT RAISED ALL OF THEM AND THEN WENT TO DEPRESSION.

Logic of expending/ contracting the economy using monetary policy through the fed, and its effect on interest rates

Increasing money supply = exponsianory Decreasing money supply = contracting Increase in the money supply to the money surplus and people buy bonds Decrease in the money supply to the money shortage and people sell bonds to the Increase in the interest rate

Logic of expending/ contracting the economy using monetary policy through the fed, and its effect on interest rates

Increasing money supply = exponsianory Decreasing money supply = contracting Increase in the money supply to the money surplus and people buy bonds then goes to decrease in interest rate Decrease in the money supply to the money shortage and people sell bonds to the Increase in the interest rate

What is a progressive tax?

A tax that charges a higher proportional tax rate as your income rises. The US tax code is a progressive tax code. ??????? ??? ????= (????? ????? ????)/(????? ??????? ??????) ???????? ??? ????= (?????????? ????? ???? ??? ???? ?????? ?? ??????)/$1 Following the ability-to-pay principle, individual and corporate income taxes are progressive taxes. A progressive tax charges a higher percentage of income as income rises. For example, if a person earning $10,000 a year pays $1,500 in taxes, the average tax rate is 15 percent. If another person earns $100,000 a year and pays $28,000 in taxes, the average tax rate is 28 percent. This tax rate progressivity is the principle behind the federal and state income tax systems.

What is a regressive tax?

A tax that charges a lower proportional tax as your income rises. A regressive tax charges a lower percentage of income as income rises. Suppose Mutt, who is earning $10,000 a year, pays a tax of $5,000, and Jeff, who earns $100,000 a year, pays $10,000 in taxes. Although Jeff pays twice the absolute amount, this would be regressive taxation because richer Jeff pays an average tax rate of 10 percent and poorer Mutt suffers a 50 percent tax bite. Such a tax runs afoul of the ability-to-pay principle of taxation.

What is a proportional tax rate?

A tax that charges the same proportional tax rate to all taxpayers, regardless of income level. AKA a flat tax.There continues to be considerable interest in simplifying the federal progressive income tax by substituting a proportional tax, also called a flat tax. A proportional tax charges the same percentage of income, regardless of the size of income. For example, one way to reform the federal progressive tax rate system would be to eliminate all deductions, exemptions, and loopholes and simply apply the same tax rate, say, 17 percent of income to everyone. This would avoid the "hissing" from taxpayers who would no longer require legions of accountants and lawyers to file their tax returns. Actually, most flat-tax proposals are not truly proportional because they exempt income below some level and are therefore somewhat progressive. Also, it is debatable that a 17 percent flat tax would raise enough revenue.

What is a government expenditure?

Federal, state, and local government outlays for goods and services, including transfer payments. Government expenditures include outlays for: Goods Services Transfer payments This set of expenditures includes funding for: Highways Defense Education

What are the benefits received principal and ability to pay principle?

Benefits-Received Principle: Those who benefit from government provided goods and services should be those who pay. Difficult to apply completely due to the existence of "public goods". The Ability-to-Pay Principle: Those who have higher incomes should pay a greater proportion of that income in taxes - regardless of the benefits they derive.

What are the fiscal policies?

Classical approach: The economy is self-correcting, and will therefore fix itself better, more completely, and faster if left alone! Keynesian approach: The government has a responsibility to actively implement taxing and spending policies to stabilize the economy. Expansionary Fiscal Policy Increase government spending Decrease taxes Increase government spending and taxes equally Contractionary Fiscal Policy Decrease government spending Increase taxes Decrease government spending and taxes equally

What backs up our money?

Commodity Money Gold and silver coins Gold and silver certificates And Fiat money

Balance of trade deficit?

Definition: A "bookkeeping system of all international transactions between a country and all other countries over a specific time period. The balance of payments is what is used to assess our trade deficit/surplus with other countries. current accounts section is made up of: Goods exports/imports Services exports/imports Investment income (net) Unilateral transfer (net) The sum of just the net outflow of goods and services is called the trade balance. If there are more goods/services flowing into the US than out - we call that a trade deficit. The capital account includes purchase of capital investments. This investment includes real estate, stocks, bonds, government debt (such as treasury bills, notes and bonds). A current accounts deficit (usually associated with a trade deficit) is balanced by a capital accounts surplus. And vice versa.

Difference between expansionary and Contractionary monetary policy

Expansionary Action: Open market operations purchase Mechanism: Reserves increase Change in money supply: Increases Contractionary Open market operations sale Reserves decrease Decreases Expansionary Discount rate decreases Borrowing reserves Increases Contractionary Discount rate increases Borrowing reserves becomes costilier Decreases Expansionary Required reserve ratio decreases Money multiplier increases Increases Contractionary Required reserve ratio increases Money multiplier decreases Decreases

How is monetary policy set at the Fed?

Giving more authority to the Federal Reserve for regulating all financial institutions. For instance reserve requirements for all institutions are set by the Federal Reserve. All depository institutions are able to borrow loan reserves from the Federal Reserve banks. Commercial banks, thrifts, money market mutual funds, stock brokerage firms, and retailers can now offer a wide variety of banking services. Interest rate ceilings were eliminated What the Fed does in general: Controls the Money Supply. Clears Checks (ACH). Supervises and Regulates Banks. Federal Deposit Insurance Corporation. Maintains and Circulates Currency. Protects Consumers. Consumer Financial Protection Bureau. Maintains the Federal Government's Checking Account and Gold. Lender of Last Resort.

How is money created?

Gold was heavy, and obvious. Many people left gold with the goldsmith, who would issue a receipt. The goldsmith would sit on his bench (banca - from which we get the word bank). If there were more people asking for their gold than there was gold held at present, then the bench was broken (from banca or bench and rotta meaning broken). The reason that the goldsmiths didn't always have the gold on hand is that they would lend it out. How much they had on hand (or in reserve) would determine the amount of money created. Today banks keep only a fraction of the deposit on hand as cash or with the Federal Reserve, and they loan out the rest. This practice is known as fractional reserve banking. Today, bank regulators specify the maximum amount of money that must be maintained by the bank. Bank regulators set rules regarding the minimum balance that the Fed requires the bank to hold in either vault cash or deposits with the Fed. Required reserves. The rules are typically stated as a percentage of the customer's deposit. Required reserve ratio. Any amount held above the required reserves, is known as excess reserves.

What are automatic stabilizers?

Government programs and tax revenues that automatically change with changes in economic condition. Because they occur automatically, they are sometimes called non-discretionary fiscal policy components. Transfer payments Unemployment compensation, Medicaid, Welfare, Food stamps, Etc.

Federal Reserve Board?

The Federal Reserve is a blend of a central bank (led by the Board of Governors) and twelve regional banks. Board of Governors Seven governors appointed by the president, and confirmed by congress. We are currently only at four (two of whom were nominated by President Trump). We went from a chairman with a background in economics, to a lawyer (Chairman Jerome Powell). There are at least two others who have been nominated. Marvin Goodfriend. He has served as an economics professor. His expertise is in central banking (and monetary policy). Michelle Bowman. She currently serves as the Kansas state banking commissioner. Nellie Liang. She currently works for the Federal Reserve.

Public choice theories?

The analysis of decision-making by governments and political entities in allocating scarce resources. James Buchanan - Nobel Laureate 1986. Problem with majority rule Benefit-cost analysis: Only those projects whose benefits outweigh the costs will be adopted. This rule tends to lead to more economically efficient projects. Majority rule tends to adopt economically inefficient projects. Special Interest Group Effect: Small groups are the primary (or only) beneficiaries, but all taxpayers foot the bill. So how does a measure pass that only benefits a minority? Logrolling: Logrolling is where one politician agrees to support a measure in return for the support from another politician for one of their measures. Rational Voter Ignorance: If Politicians, appointed officials, and bureaucrats are on the supply side of public services... Then special interest groups and voters are on the demand side. Most voters remain rationally ignorant of the real issues. They are rationally ignorant because the cost of obtaining the information necessary to make rational decisions, and provide rational oversight, is higher than the benefit that is expected to accrue to the individual voter. So they leave the analysis of that data to the politicians, appointed officials and bureaucrats (who may have their own agenda). Bureaucratic Inefficiency: As bureaucracies grow, they tend to amass more power (bureaucrats are permanent - whereas elected officials tend to be temporary). Without the profit motive, it is harder to assess their performance. How do we know when they are doing well? There is no competition for service providers (who competes with the federal government?). Budgets are set by want and political pull - not by what is most cost efficient or most effective. Objective seem to be to maximize prestige and security - which is not cost effective. Shortsightedness Effect: The political cycle is either two, four or six years. But most decisions politicians make have a far longer term impact than that. If a program has a cost over the short-run, and most of the benefits are over the long-run, many politicians will not be in favor. They need the benefits to accrue before their next election.

What is the shape of the supply curve for money and why?

The supply of money curve (MS) is a vertical line because the $1,000 billion quantity of money supplied does not respond to changes in the interest rate.

annual deficit and approximate side

its always negative because we have more outlays then reciepts