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Chapters 14, 15, and 16 Notes

by: Rachel Moore

Chapters 14, 15, and 16 Notes ECON 2105

Marketplace > University of Georgia > Economcs > ECON 2105 > Chapters 14 15 and 16 Notes
Rachel Moore
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These notes cover chapters 14, 15, and 16 which was discussed in class April 4 - April 15.
Class Notes
ECON2105, McWhite, Macroeconomics, uga, chapter14, Chapter15, Chapter16
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This 7 page Class Notes was uploaded by Rachel Moore on Thursday April 21, 2016. The Class Notes belongs to ECON 2105 at University of Georgia taught by McWhite in Summer 2015. Since its upload, it has received 64 views. For similar materials see Macroeconomics in Economcs at University of Georgia.


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Date Created: 04/21/16
ECON 2105 April 4, 2016 – April 15, 2016 Chapter 14 Textbook Summary Great Recession • Began December 2007 • Significant problems in the financial markets similar to the Great Depression • Official duration was 18 months (December 2007 to June 2009); longest since World War II. • Took almost 4 years for real GDP to reach its pre-recession level. • Unemployment rate climbed to 10% and remained close to 8% even 5 years after it began. • Decline in aggregate supply was caused by problems in the loanable funds market due to declining values of real estate. • The Dodd-Frank Act is the primary regulatory response to the financial turmoil that contributed to the Great Recession. It established several new oversight bodies and regulations on financial institutions to reduce risk in financial markets. • Decline in aggregate demand was caused by a decline in wealth and a decline in expected income. • Aggregate demand and aggregate supply both shifted to the left. • What are three reasons that made the recession come to be known as the “Great Recession?” o The recession was worse than a typical recession. o There was noticeable stress in financial markets, making it similar to that aspect of the Great Depression. o The effects (high unemployment rates and slow real GDP growth) persisted long after the recession was over. The Great Depression • Real GDP fell from $977 billion (1929) to $716 billion (1933) • Took 7 years for real GDP to return to its pre-recession level • Unemployment rate went from 2.2% (1929) to 25% (1933) • The unemployment rate remained above 15% for almost the entire decade of the 1930s. • At the end of the 1930s, the general price level was still 20% lower than in 1929. • Primary cause of the Great Depression was a decline in aggregate demand; mostly caused by faulty macroeconomic policy. o Macroeconomic policy encompasses government acts to influence the macroeconomy; two types are monetary policy and fiscal policy. o Fiscal Policy comprises the use of government’s budget tools, government spending, and taxes to influence the macroeconomy. Created By: Rachel Moore Not for redistribution. o Monetary Policy involves adjusting the money supply to influence the macroeconomy. • Beginnings of the Great Depression o Black Thursday: October 29, 1929; the day the stock market crashed o Government implemented policy to reduce the quantity of money in the economy. o Financial panic caused people to withdraw their deposits from banks, which caused more than 9,000 banks to fail. o The government did not help the banks; which led to more of a decline in the money supply. • Other possible causes – Hoover and Roosevelt raised taxes to balance the federal budget, which also caused a decrease in aggregate demand. Classical economists stress the importance of aggregate supply and generally believe that the economy can adjust back to full employment equilibrium on its own. Keynesian economists stress the importance of aggregate demand and generally believe that the economy needs help in moving back to full employment equilibrium. Chapter 15 and Chapter 16 Fiscal Policy: government use of spending and taxes to influence the economy. Who controls fiscal policy? The president and congress; congress has more control over the details. ???????? = ???? + ???? + ???? + ???????? Government Outlays: Transfer payments (payments made to individuals from government) Spending (government receives goods and services) Outlays: • Interest (you have to pay on what you borrowed) • Discretionary (whether to fix the roads this year) • Mandatory (laws requiring spending regardless of budget; social security) Mandatory Spending: • Social Security (1935; benefits starting at age 65) o Life expectancy has changed approximately 20 years since its creation o Obvious changes that are unlikely to happen anytime soon ▯ Increased retirement age – not going to happen because old people vote and want their benefits ▯ Chained CPI Created By: Rachel Moore Not for redistribution. ▯ Means-testing – not giving people benefits to people with a certain number of money; not going to happen because unfairness and setting certain limits, etc. • Medicare (1965; mandated healthcare for retirees) o Same issue as social security • Medicaid (1965; mandated healthcare for low income) • US Government currently has $2 trillion in mandatory spending US Debt: the outlays are larger than federal reserves; Discretionary Spending: there is spending that congress and the president can change from year to year • $1.2 trillion of $3.5 trillion is discretionary spending • 34% of recent budgets is discretionary spending • Politicians are never specific when talking about cutting government spending because each part of spending affects everyone differently, and they do not want to make a sector mad. Revenue Sources: • Taxes: money collected to pay for gov’t services. o Social Insurance Taxes (S.S. and Medicare) o Income Tax (Progressive Tax Rate) o Other (Estate, Excise, Customs, etc.) • Income Tax: tax on your working wages o Progressive marginal rates – at increasing levels, as you earn more, you pay a higher % o Some people pay a “negative” federal income tax • Social Insurance Tax: S.S. and Medicare (Payroll Tax) o 15.3% of income (employer and employee split 7.65% each) Debt is the accumulation of all yearly deficits. Fiscal Policy Potential Impacts: government influences on the economy; AD and AS; “correct policy” • Expansionary Policy: using spending and taxes to improve current economic conditions (increase in AD) Created By: Rachel Moore Not for redistribution. 1. Economic activity decrease, AD decrease, Recession 2. Two options: (1) wait for economy to adjust (2) expansionary policy (government) Option 1 (LR) How long will it take? What happens in between? Option 2 1. Government action increases AD 2. Moves AD from AD back to1AD 0 3. Back to Y* and P 0 How? Decrease taxes (C (consumption) increases); increase government spending (G increases) Impacts on Outlays, Revenues, and Deficits 1. What happens to outlays and revenues in a recession? 2. What happens to outlays and revenues with expansionary policy? Cutting taxes will decrease revenues; increasing government spending will increase outlays. 3. Deficit impact? Both decreasing taxes and increasing government spending will increase the deficit. Created By: Rachel Moore Not for redistribution. What if the government wants to “slow” the economy? Contractionary policy: using spending and taxes to reduce AD growth to improve the economy; decrease AD. 1. Economy “over heating”; AD increase; passed Y* 2. Two options: (1) wait for economy to adjust (2) contractionary policy Option 1 1. all prices adjust (SRAS decreases) 2. SRAS moves from SRAS to SRAS 0 1 3. back to Y* 4. price level now P 2 Option 2 1. government action decreases AD 2. moves AD from AD to AD 1 0 3. back to Y* and P 0 How? Raise taxes (consumption decreases); decrease government spending Created By: Rachel Moore Not for redistribution. Multiplier Effect: Your spending becomes someone else’s income… that income becomes someone else’s income… etc. etc. ???????????? → ???????????????????????????????? ???????????????????????????????????????? ???????? ???????????????????????????? = ∆ ???????????????????????????????????????????? ∆ ???????????????????????? ▯ 1 ???????????????????????????????? ???????????????????????????????????????? ???? → (1 − ????????????) Issues with Fiscal Policy: • Time lags; how long does it take to implement something after finding out something is wrong with the economy? • What if the government is wrong? • Crowding out • Savings shift Supply Side of Fiscal Policy: goal is to shift the LRAS to the right and stimulate growth in the economy. 1. Tax Credits (research and development) 2. Increase education investment 3. Decrease corporate taxes 4. Decrease marginal tax rates Created By: Rachel Moore Not for redistribution. Eventually, the tax rate will get so high that people stop working and tax revenue will decrease. With this theory, depending on where the economy is currently, you can increase taxes and the economy won’t go in the tank. You can also decrease taxes and increase tax revenue. Created By: Rachel Moore Not for redistribution.


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