Exam 2 Study Guide
Exam 2 Study Guide ECN 150
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This 5 page Study Guide was uploaded by Alexis Ibarra on Friday April 15, 2016. The Study Guide belongs to ECN 150 at La Salle University taught by Francis Thomas Mallon in Summer 2015. Since its upload, it has received 27 views. For similar materials see Macroeconomics in Economcs at La Salle University.
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Date Created: 04/15/16
Exam 2 Study Guide Income, spending and savings schedule o Income and spending are directly proportional o Table of income, spending, and savings o Useful because it gives the components to which we can calculate the mpc and mps Marginal rates of consumption and savings o Marginal propensity to consume (MPC) Change in consumption over change in disposable income o Marginal propensity to save (MPS) Change in savings over change in disposable income o MPC+MPS=1 Incorporating a 45 degree line to graph maintainable GDP o Aggregate expenditure (AE)= C + I o If C+I line exceeds 45ᵒ line= expansion in output production o If C+I line is less than 45ᵒ line= contraction in output production Savings and dissavings identified on a graph with a 45 degree line and consumption line o Calculation of the multiplier o Spending multiplier 1/MPS o Tax multiplier MPC/MPS o Balanced budget multiplier = 1 Application of the spending multiplier o Government spending (infused spending) x spending multiplier = increase in output Components of investment spending o Purchases of new machinery and equipment plus changes in business inventories Planned investment vs actual investment o Planned investment Projected or desired amount of [investment] o Actual investment Actual level realized of [investment] Includes items such as unplanned changes in inventories o Actual > Planned= Contraction o Actual < Planned= Expansion Effect on maintainable GDP when planned and actual investment differ o GDP wouldn’t be maintainable if there is extra unwanted inventory accumulation Fiscal policy impact on maintainable GDP o The President and Congress represents our fiscal policy makers. Their tool is the control of the tax and spend decisions of the government. o Increase income and therefore increase consumption Government spending can potentially increase GDP due to the multiplier effect Government can increase GDP by lowering taxes Fiscal policy action impact on budget deficit or surplus o Deficit Increase taxation o Surplus Increase spending Expansionary and contractionary fiscal policy o Fix an underperforming economy Balancedbudget multiplier o If there are like changes that offset one another between government spending and taxation, the change in GDP will be equal to the change in government spending (G). Government increased spending by %50 billion but they don’t want that to cause debt, so they increase taxes by $50 billion. So the effect on the deficit is 0. So the change in GDP = change in government spending. o The difference between the spending multiplier and tax multiplier o Balanced budget multiplier =1 Government spending × 1 Definition of money o M1 Currency, coins (not in bank), demand deposits (checks) Functions of money o Medium of exchange, Standard of Value, Store of Value Backing of the U.S. money supply o Trust/ Fiat currency Value of money o Money demand = Transaction demand + asset demand o Its relative scarcity gives it value Transaction demand for money o Money that we need to spend on goods and services (rent, food, clothes, etc) o Graphically seen as a vertical line Asset demand for money o Money that we set aside to keep and save as assets o Graphically seen as a downward sloping line Effect of changes of the money supply on interest rates o An expansion in the money supply results in lower interest rates which entices consumers to spend more and hence raise GDP and lower unemployment o A contraction of the money supply results in higher interest rates which decreases spending Reduces risk of inflation Structure of the federal reserve system Responsibilities of the federal reserve open market committee o Controls money supply o Make decisions that affect the size of the money supply and therefore affect interest rates Functions of commercial banks o Accepting deposits and making loans to consumers Fractional reserve banking o Certain percentage of deposits is required to be left alone and not used to give out loans Required reserves and excess reserves o Required reserves Amount of reserve set by federal government that commercial banks have to have o Excess reserves Excess reserve. The bank is able to lend this out. Money supply creation o Banks use excess reserves to loan out money and therefore can create money o Monetary multiplier= 1/Legal reserve requirement Tools of the federal reserve system used to control the money supply o Buy/sell government services (bonds) Market value = price at which bond was purchased & daily value Face value = value of bond when it reaches maturity Lowering/raising the rate or return for bonds Interest return (rate of return)= face value – market value Most frequently used tool Selling bonds results in contraction of money supply Will put currency and coin out of circulation and add bonds into circulation Decrease the market price of bonds to entice people to buy bonds o Interest rates will go up Buying bonds results in expansion of money supply Will put currency and coin into circulation and bonds out of circulation Increase the market value of bonds to entice people to sell their bonds o Interest rates will go down Market value and interest have an inverse relationship o Lowering/raising the Discount rate Rate of interest charged by the federal reserve to member banks who wish to borrow from the federal government Amount of interest banks pay to borrow money from the government Increasing rate results in contraction of money supply Banks are less inclined to borrow money from fed and will not have money to give to consumers Decreasing the rate results in expansion of money supply Banks are more inclined to borrow money from fed and hand out money to consumers Used regularly but not as much as selling and buying bonds o Raising/lowering Legal reserve requirements The minimum amount of reserve banks can keep Increase in reserve requirements will result in contraction of money supply Banks will be forced to keep higher percentage of deposits and have less to lend out Decrease in reserve requirements will result in expansion of money supply Banks will not be able to keep a lower percentage of deposits and have more money to lend out Very powerful tool, used by government very rarely o Graphically an expansion of money supply will shift to the right and contraction of money supply will shift to the left Expansionary and contractionary monetary policy o Expansionary monetary policy: If the FOMC wanted to increase the market money supply: buy government securities, lower discount rate, lower legal reserve requirements. Causes Curve shifts outward to the right o Contractionary monetary policy: If the FOMC committee wanted to decrease the market money supply: Sell government securities, raise discount rate, raise legal reserve requirements. Causes Curve shifts inward to the left
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