ECN 150: Week 15 Notes
ECN 150: Week 15 Notes ECN 150
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This 4 page Class Notes was uploaded by Alexis Ibarra on Friday May 6, 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 9 views. For similar materials see Macroeconomics in Economcs at La Salle University.
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Date Created: 05/06/16
WEEK 15 NOTES 5/2/16 At AD1, high unemployment, inadequate GDP growth Fiscal Policy says for government to increase spending or decrease taxation This increases national debt! taxrevenues −Governmentspending ¿deficit>¿surplus If the nation experiences a deficit that year, debt is expanding. Surplus that year, debt decreases. If there is a deficit, we borrow money! Other countries give us money because our interest rates that we get away with paying are ridiculously low! At AD2, Our deficit is now less, we now have full employment but debt is continuing to increase So we want a surplus!! So we want to increase tax revenues and decrease government spending. BUT this could potentially cause a contraction in the graph. GDP growth could slow or stop and unemployment could rise! If a President did this, he would not get reelected. For government to buy bonds from people, they need money! Where do they get it? They sell more bonds to other people and use the cash to buy bonds from those who wish to cash theirs in. When is this a problem? When others don’t want to buy bonds! 1 Unemployment vs inflation graph (Phillip’s Curve) : It used to be taught that if inflation was high, unemployment was low. If inflation was low, unemployment was high. But then we found ourselves at high unemployment and high inflation at the same time! How can this be? Stagflation. 5/4/16 Stagflation: high unemployment and high inflation at the same time! Spending can no longer be used to fix this!! Expanding spending=lowers unemployment, but inflation increases. Contrast spending= lowers inflation, but unemployment increases. This didn’t make sense according to the Keynesian method People realized that the Keynesian method had a fixed aggregate supply. They thought, what if the aggregate supply wasn’t fixed? Why is it fixed? Because government has so many restrictions! If the government backs off then the aggregate supply could grow. So government needs to fix the progressive tax structure. Progressive Tax Structure: Those who earn a higher level of income, pay a higher percentage of tax on that income than those who earn lower levels of income. Income Income Tax Rate 020k 0% 20k100k 15% 100k250k 22% 250k450k 28% 450kup 35% Lowering the income tax rate will allow aggregate supply to increase. Unemployment and inflation lowered!! Stagflation was fixed. 2 However, now, the real estate market crashes! Now what?... Some people (Classicals) said we should just let it play out and fix itself. Or we could go back to the Keynesian methodology and try Stimulative Policy Action. The right action depends on the situation! Lorenz Curve: Analyzes how the income of a society is being allocated among the members of that society. Absolute equality: 20% of the people earn 20% of the income, 40% of the people earn 40% of the income, etc. (Represented by a diagonal line on the Lorenz curve). The first 20% people earn 4% of the income, the next 20% people earn 10% of the income, the next 20% people earned 15%, and the last 1% of people earn 35% on the income... (see Lorenz curve graph) The difference between the absolute equality line and the curve is the degree of deviation. The further the curve is from the 45 line, the more diverse it is. The closer the curve is to the 45 line it is, the less diverse it is from being equitable. Minimum Wage: The minimum amount of money that an unskilled worker can be paid. 3 Unskilled Labor W1 and Q1 is without government intervention W2 and Q2 is with government intervention and minimum wage. Now the people between Q2 and Q1 have lost their job. This causes degree of deviation to increase! (bad) 4
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