ECN 150: Week 11 Notes
ECN 150: Week 11 Notes ECN 150
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This 5 page Class Notes was uploaded by Alexis Ibarra on Monday April 11, 2016. The Class Notes belongs to ECN 150 at La Salle University taught by Francis Thomas Mallon in Summer 2015. Since its upload, it has received 16 views. For similar materials see Macroeconomics in Economcs at La Salle University.
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Date Created: 04/11/16
WEEK 11 NOTES 4/4/16 Prof. Mallon’s Graph: *This GDP wouldn’t be maintainable because there will be extra unwanted inventory accumulation! If we generate a level of output that isn’t maintainable, the actual level of consumption + actual level of government spending is causing a level of growth in inventories that is beyond the desired level of inventory accumulation that businesses want. Underperforming Economy: Less than satisfying because we aren’t achieving our economic goals (satisfying, growing rate of GDP and full employment). What would cause us to be operating at a maintainable level that is less than the satisfying results? Lack of Spending in the economy! Underperforming economy Fiscal policy action could Government spending Too slow GDP growth or GDP be used to remedy this situation Government taxation decline Too high level of unemployment From Friday: If they chose to increase government spending to increase GDP: The government needs to spend 50 billion to grow the GDP by 200 billion! Infusion ($50 billion) × Multiplier (4) = $200 billion Prof Mallons Graph: If they chose to decrease taxes to increase GDP: If the government decreased taxes by $50 billion, the GDP would only grow $150 billion! *By lowering taxes by $50 billion, income increases by $50 billion. But the first round of spending created is $37.5 billion and saving is $12 billion. (due to the mpc and mps that we indicated) So the infusion doesn’t equal $50 billion… it equals $37.5 billion! We can easily calculate the change due to decreasing taxation as opposed to increasing government spending using the Tax Multiplier. mpc = .75 =3 Tax Multiplier= mps .25 We can then multiply the tax decrease ($50 billion) by this tax multiplier!! $50 billion × 3 = $150 billion Balanced Budget Multiplier: 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). If we wanted to initiate policy actions that would cause us to have to effect on our deficit, these actions would need to offset one another. In other words, if we the government wanted to spend $50 billion more on new roads, but we didn’t want our deficit to grow, how would we do this? (Raise Taxes by $50 billion!) The GDP changes by the amount of government spending. ($50 billion here) G ^ $50 billion × 4 = 200 T ^ $50 billion × 3 = <150> =50 Billion 4/6/16 The President and Congress represents our fiscal policy makers. Their tool is the control of the tax and spend decisions of the government. The Federal Reserve System represents our monetary policy makers. Their tool is their control of the money supply. Both groups want to obtain the same 4 goals that have been talking about. But it’s the people that we don’t elect (Federal Reserve System), that control out money supply!! What is included in our money supply? Currency, coins, demand deposits (checks) M1= currency, coin, demand deposits What backs (stands behind) our money supply? TRUST It is based on our belief that our government will be here tomorrow. The reason cash functions, is because we trust. Cash in not redeemable for gold when the government crashes. Fiat currency: We are backed by a promise, and only a promise. The promise that our government will be here tomorrow. (If your nation was invaded, our money supply would be worthless). What gives our money value? Its relative scarcity. Example: If we were in WWI time, and a lady has a wheelbarrow full of Dutch marks, it has very little value. The amount of goods able to be purchased by that wheelbarrow was decreasing because the resources of the society were going to making tanks and guns. In this example, money was not scarce, it was ridiculously abundant. When money is abundant, the money depreciates in its value and stops being able to affectively function in the society. So we have to try to keep money relatively scarce. What does money do? What if we didn’t have money? What does it actually accomplish? Money serves 3 basic functions: Medium of exchange: Dual coincidence of wants: you have to have something I want, and I have to have something you want. (one of those things is usually money) Indivisibility of items offered in trade: (trading a pig for a pen isn’t fair, trading a pen for a pig leg is fair but the pig is indivisible) Money is divisible, but items are not. (you can pay less than $1 by using coins). Standard of Value: Everything that is offered for sale can be stated in terms of the monetary value for which the transaction will be valued. (You know zucchini is worth $1.29. But if we didn’t have money, the market would have to state every item or thing that they would be willing to take in exchange for a zucchini. That would take forever!) Store of Value: You can store/save money for a later use. For this, money has to be durable (physically). And it has to be durable relative to its continuance or maintenance of value. (Ex: In WWI time, the money (mark) lost its value. People wanted to get rid of it right away because its value was decreasing). 4/8/16 The Federal Reserve System Commercial banks makes money by accepting deposits and making loans. They serve businesses and the regular citizens of the community. The Federal Reserve District banks (there are only 12 in the nation) don’t service the regular citizens. They do business with the commercial banks. The 12 Federal Reserve Banks: Federal Reserve Board of Governors: 7 members, 14 year terms, staggered so that a term expires every 2 years. Chairperson = Janet Yellen, Ben Bernancke was before her, and Alan Greenpar was before him. Federal Reserve board of governors is in charge! The board of governors consists of 12 members. Each member commits to 14 years of service. The terms are staggered so that one expires every 2 years. This maintains the independence of the board of governors because when they need a new member, the president nominates the person who will replace the one that is leaving. The nominee must be approved by congress. And since a president can only serve a max of 8 years, they will never have nominated the majority of people on the board until they are leaving their last term. This is how the Reserve stays separate and distinct from the federal government. Federal Open Market Committee (FOMC): 12 members, 7 board of governors, 1 President of NY Fed Res District, and 4 other District Res bank Presidents who rotate every 2 years. This is the party within the Federal Reserve that is responsible for setting the monetary policy of our nation. Meets every 6 weeks to evaluate the state of the economy. The fiscal policy group has control over the tax and spend decisions. The monetary policy makers have no control over the tax and spend decisions of the federal government, but they do have control over the money supply. So to obtain their objectives, they can expand of contract the money supply when they see the need to be able to impact an unfavorable state of the economy. They control the money supply with the following tools: Buying/selling government securities, raising/lowering the discount rates, or raising/lowering legal reserve requirements Discount Rate= Interest rate that the federal reserve bank charges commercial banks that borrow money from them. Federal Funds Rate= The rate of interest that commercial banks charge one another for borrowing money. If the Federal Reserve lowers the discount rate, the commercial bank will want to lend money to citizens more aggressively. (Expands the money supply) If the Federal Reserve raises the discount rate, commercial banks won’t give out as many loans to citizens. (Contracts the money supply) If the federal Reserve buys government securities (Expands money supply) If the federal Reserve sells government securities (Contracts money supply)
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