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Weeks 3-5

by: Greg Caceres-Munsell

Weeks 3-5 ECON 103

Greg Caceres-Munsell
U of I
GPA 3.6
Macroeconomic Principles
Baer, W

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About this Document

This set of six expansions upon the lectures attempts to focus in on the most helpful and important concepts laid out for us (especially because of the fast approaching midterm); these three weeks ...
Macroeconomic Principles
Baer, W
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This 8 page Bundle was uploaded by Greg Caceres-Munsell on Thursday September 24, 2015. The Bundle belongs to ECON 103 at University of Illinois taught by Baer, W in Fall 2015. Since its upload, it has received 35 views. For similar materials see Macroeconomic Principles in Economcs at University of Illinois.


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Date Created: 09/24/15
924201 5 Lecture 56 Wednesday September 9 2015 1006 AM Domestic Product and Income GDP made up of private investment consumption government purchases exports v imports Nominal v Real GDP 0 Real accounts for inflationinterest rates price index 0 nominalprice index X 100 RGDP Propensity to Consume amp Save Average Prop to Consume 0 Total change in consumption 0 Consumptionncome o Decreases with increase in income Marginal Prop to Consume 0 Change in income I Average Prop to Save 0 100 APC APS o Increases with increase in income 0 Marginal Prop to Save 0 of change in income saved 0 MP5 MPC 1 Investment always Savings OneNote Online Good to have an idea of supplydemand markets below while looking at Keynesian Cross above and what happens to both in a given scenario Green represents inflationary gap where economy is producing too much in relation to equilibrium and red represents recessionary gap producing too little httpsonenoteofficeappsivecomoonenoteframeaspxFiSD F483C578388FD48D 413ampHem uIampC5810DM2 SKY WACWSH ampuien USamprsen US 12 9242015 OneN ote Online Cont Keynesian Cross Equilibrium always lies on intersection between AE ine investment consumption and 45 degree line C a MPC x Y Y C I O Y a M PC x Y H Wherequot a quot is the y intercept Change in Ychange in AE 1MPC When Government spending is added AE C I G o AEGMPCXT o T Tax 0 Tax mutipier Change Y Change T MPC x 11MPC 0 Y int change noted by quot b quot instead of quot a quot https onenoteoffi ceapps ivecomoonenoteframeaspxF i SD F483C578388F D48D i413ampH em ul ampC 5810D M 2 SKYWACWSH ampui en U Samprsen U S 22 9242015 OneN ote Online Lecture 78 Monday September 14 2015 956 AM A few simplified definitions 0 Regressive Taxes Fall more heavily on the lower income groups 0 Progressive Taxes Fall more heavily on the upper income groups 0 Aggregate supply Total amount of goods that society has produced 0 Aggregate Demand Total amount of goods that society has consumed As Savings 2 Investment H H H H Because C I G and C are parallel A mmmntjs cmmumai AB Segment A Segment D C amount is consumed AND Segment AB Segment DE 2 I G gt lmmstedrandP BHle Segment BC Savings ie not prshwedrso CJS nOtSOld C 18 made up of involuntary purChaSed immsUmnt 0 Since they are not sold Full products become inventory employment ie investments by businesses equal to savings by households Although full employment is present at Yf not all products will be purchased so Yf will shift left to find equilibrium o ie wages employment goods produced will decrease and move employment levels left towards equilibrium In the above case the aggregate demand at full employment exceeds aggregate supply in part represented by the 45 degree line if this is the case an inflationary gap exists and quantities on a supplydemand curve must shift leftward to find equilibrium Visualized in lecture 6 notes Conclusion Full employment is not necessarily the same as equilibrium and if this is the case how can full employment be reached and kept stable in a free market system L Fiscal Policy Government can take different actions to close recessionaryinflationary gaps oIncrease or decrease in government expenditures oIncrease or decrease income tax https onenoteoffi ceapps ivecomoonenoteframeaspxF i SD F48SC578388F D48D 413ampH em ul ampC 5810D M 2SKYWACWSH ampui en U Samprsen U S 12 9242015 OneN ote Online Multiplier o Recessionary gap of 100 Billion exists Government may decide to step in and spend to close gap MPC Marginal propensity to consume may be 5 Government can spend only fractional amount and count on public39s propensity to consume to in turn close the full gap 0 o o Essentially this says that when the hithiscasevuth m1MPC government spends 10 on new roadwork iciaidi igstgedrilggl l 1 those ten dollars go towards a worker39s demamior AEzzaggixgte salary which he will then spend a qend mrethe portion of in this case 50 of it and vae mwntlt yrwedsto that 50 equally 5 may go towards a Spemi50B farmer39s wages for his crop and so on and so on until the amount of money involved is so minuscule it stops making a difference a ll MPC amount spent by government results in final SlOO B I F513 quot IMPL amp We aim 03 G https onenoteoffi ceapps ivecomoonenoteframeaspxF i SD F483C578388F D48D 413ampH em ul ampC 5810D M 2 SKY WACWSH ampui en U Samprsen U S 22 924201 5 OneNote Online Lecture 9 Monday September 21 2015 1005 AM Definition of Full Employment Different industries may have different capacitiesemployment needs Can be very flexible term Relationship between inflation and unemployment shown by quotPhillips Curvequot right oAs prices rise oAs prices fall high rates Note that as in many other exponential functions this curve cannot truly attain 0 unemployment rate nor a lack of any price unless of course economic systems were to collapse completely to unemployment hits lows unemployment rises to very Output v price shown below displays supply and demand with horizontal curved and vertical supply areas with different effects Blue portion of supply represents all points at which no matter what consumers are willing to pay supplier are unable to provide any more of the product very inelastic supply red portion of supply represents all points at which suppliers can only sell products at a certain price despite how much they produce Black represents normal production variances and supplydemand interaction gt 3 Velocity of Money Money Identity not theory 1 The more money present the more division I I I of labor specialization is possible which Money supplyxvelOClty PriceXQuantlty takes society away from barter systems I 2 Ends the coincidence of wants barter Money supplyxvelOClty 2 GDP https onenoteoffi ceapps ivecomoonenoteframeaspxF i SD F483C578388F D48D 413ampH em ul ampC 5810D M 2 SKY WACWSH ampui en U Samprsen U S system endsm products are no longer unique and so disputes over who gets what are no longer common 3 Has to be something tangible accepted by society and perishable physical generally 13 9242015 OneN ote Online Functions of Money Unit of account units given to a certain money to make it unique oUS money expressed in dollars oMexican money expressed in pesos oEuropean Union money expressed in Euros Medium of exchange oUsed to replace tradingbartering oOne person wants a cat another wants a comb and another wants a house Money will act as the middle man for all of these things despite their lack of relation to each other Store of Value oRetains its relative value over time oIs limited in supply oGold is an ideal form of money because it is extremely limited as a precious metal and because of this keeps the same value over time Kinds of Money oCoins 2 types oPrecious metals whose mass represents its exact value OR oCoins whose value is not wrapped up in what they39re made of this type is basically the same as paper money Paper money oCan be backed up by precious metals given value the same way coins are though this is no longer common oMost paper money is now considered Fiat money ie it does not have any actual value This is basically an IOU Fiats are also referred to as currency oThis does not mean that central banks do not have precious metals in case of emergency consider Fort Knox simply that their entire currency is not backed up by it Demand deposits oCheck writing direct deposits to accounts creditdebit cards oThese are basically an extension of the paper money though not the same Origin of Banks Goldsmiths in towns were given gold coins by families to protect in case of robbery Lending tradition began based on confidence of people who stored their gold their Protector of gold would begin to loan more and more of the stored gold to the point where most people had no idea where there gold might be oThis would39ve required insurance for the gold on the 39banker39 side the same way we have today in case a borrower does not pay back Money Supply in values Money supply 1 M1 25073 Traveler checks 38 Demand deposits 9578 Other checkable deposits 4498 Currency 10923 https onenoteoffi ceapps ivecomoonenoteframeaspxF i SD F483C578388F D48D 413ampH em ul ampC 5810D M 2SKY WACWSH ampui en U Samprsen U S 23 924201 5 OneNote Online Central Banks Developed https onenoteoffi ceapps ivecomoonenoteframeaspxF i SD F483C578388F D48D 413ampH em ul ampC 5810D M 2SKY WACWSH ampui en U Samprsen U S Due to breakdowns in bank systems that loaned out too much Owned or regulated by Government that a currency belongs to Central banks determine and govern all banks under it as well as the amount of money oIt can print affirm or deny the amount of money that will be put on the market oA kind of Father Supplier for our demandsupply model Keeps requirements and restrictions on the amount of money that can be loaned out Determines certain interest rates either directly or indirectly 33 924201 5 Lecture 10 Wednesday September 23 20 Central Ban OneNote Online 15 1000 AM ks cont bank or money multiplier 1reserve requirement Banks New New Reserves If 20 rr 2 l2 5 Deposits Loans 1 1000 800 200 In the case to the left l2 2 800 640 160 x original new deposit 5 X 1000 5000 3 640 512 128 4 512 4096 1024 The smaller the reserve 5 requirement the greater the total new deposits Total 5000 4000 1000 Monetary Policy Multiplier shows maximum amount of money that might be created assuming all banks involved loan all the money not in their oIndependent of country39s treasury and fiscal policy oCarried out by central banks Tools ofm 1 Reserve requirements Raise them to limit money supply Decrease them to increase money supply 2 Discount Rate Banks underneath the central banks can borrow from them If banks do not have enough funds to loan OR too many people are asking for their deposits back so that banks come up short Interest is charged to banks that borrow Rates can be decreased to encourage bank borrowing increased to discourage it 3 Open Market Operations t Treasury issues new bonds to cover budgetary deficit Federal reserve US central bank buys and sells government bonds in open market IE anyone can buy them from the federal reserve Federal reserve cannot create bonds only buysell Government creates and affirms bonds apart from quotthe fedquot federal reserve Interest rates on bonds cannot be set by government only dependent on free market quotpricequot of bonds Q reserves when examining monetary policym Quantity and velocity assumed as constant MmoneyXVvelocity PpricexQguantity to get at open market operationsm define the difference between a stock and a bond Stocks Speculation leads individuals to invest some money in a company stockholders then own a certain portion of that company and may either be paid dividends or sell their stocks selling stocks can either result in a net gain or net loss o Dividends not legally bindingrequired conditions for stock holders e value depends on success of company Bonds Have intrinsic value and can effectively act like cash stand as an investment in either a private firm or the government EX Individual buys a ten year bond worth 200 at 15 interest gets paid back 15 of that original 200 every year 15 x 200 30 every year for ten yearsm individual had invested 200 and expects 300 in the future or a 100 gain or some other values that yield profit to the buyer o Due to marketm Interest rates and bond prices are inversely related o InterestMUST be paid to bond buyer httpsonenoteofficeappsivecomoonenoteframeaspxFiSD F483C578388FD48D 413ampHem uIampC5810DM2 SKY WACWSH ampuien USamprsen US 11


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