Eco 2013 notes week of 4/4-4/8
Eco 2013 notes week of 4/4-4/8 ECO 2013
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This 6 page Class Notes was uploaded by Jessica Ralph on Thursday April 7, 2016. The Class Notes belongs to ECO 2013 at Florida State University taught by Joab Corey in Spring 2016. Since its upload, it has received 12 views. For similar materials see Macroeconomics in Economcs at Florida State University.
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Date Created: 04/07/16
Keynesian economics Reason for sticky wages and prices 1. Trade unions and large corporations enter into long-term contracts 2. Menu costs: the costs of changing prices As a result of sticky prices, businesses produce the amount demanded *** Spending is what matters *** Marginal Propensity to Consume (MPC) MPC: amount of additional income that is consumed o MPC = additional consumption ÷ additional income $80 ÷ $100 = .80 $1 .8 .64 .51 … o M = 1 ÷ (1- MPC) = 1÷ (1-.08) = 1÷.2 = $5 o Note: for the multiplier to be effective it must come from resources that otherwise would have been unemployed Broken window story/fallacy o when a window is broken, money is forced into the economy to fix it. Therefore, should we be breaking things and destroying products to make more new products? Story for classical Fallacy for Keynesian Budget deficits and surpluses Debt is accumulation of the deficits over year Balanced budget: government revenues (taxes)is equal to government expenditures o T = Tax revenue o G = government expenditures If T = G then we are running a balanced budget Budget deficit: government spending is greater than government revenues o T < G During recession we will naturally go into a deficit T decreases = G increases (more people collecting unemployment, welfare, etc.) o How is this possible? How does the government spend more money than it has? It borrows from country’s debt Budget surplus: government revenue is greater than government spending o T > G During expansion we will naturally go into surplus Increase T = G decrease Changes in size of budget deficit or surplus have 2 main sources o 1. reflection of the state of the economy o 2. Discretionary fiscal policy: deliberate changes in tax policy/government expenditures designed to affect the budget deficit or surplus Explains how we have been running a deficit for about 65 years without going into a depression Keynesian view of fiscal policy Expansionary fiscal policy o 1. Increasing government expenditures o 2. Reducing tax rates Designed to bring the economy out of recession by increasing aggregate demand Expansionary policy will increase the seize of budget deficit AD Keynes recession graph The big debate: classical economists believe that when we are in recession we should leave the economy alone because it will fix itself. Keynes disagrees because IR and wages are sticky and the economy is going to stay as it is. To fix it, he suggested expansionary fiscal policy Restrictive fiscal policy o 1. Decreasing government expenditures o 2. Raise tax rates Designed to bring the economy down from an expansion by decreasing aggregate demand Restrictive policy will reduce the size of the budget deficit AD Keynes expansion graph Keynesians believed in the use of the counter-cyclical policy, rather than balancing the budget o Counter cyclical policy: policy that moves the economy in the opposite direction from the forces of the business cycle Recession: expansionary policy Exoansion: restrictvie poliy Fiscal policy summary table and graph Timing problems of fiscal policy Effectiveness of fiscal policy is reduced by the following timing problems o 1. Ur ability to forecast is extremely limited o 2. Change in fiscal policy requires legislative action, which tales a long time o 3.
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