Week 7 Notes
U of I
Popular in Macroeconomic Principles
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This 3 page Class Notes was uploaded by Greg Caceres-Munsell on Friday October 16, 2015. The Class Notes belongs to ECON 103 at University of Illinois taught by Baer, W in Summer 2015. Since its upload, it has received 57 views. For similar materials see Macroeconomic Principles in Economcs at University of Illinois.
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Date Created: 10/16/15
10162015 OneN ote Online Lecture 13 14 Friday October 16 2015 154 AM Monetary Policy More flexibleeasier to use More effective against inflation Possible to conflict with treasury39s intentions Fiscal Policy More effective against recession Difficult and sluggish to use quotbudgetary processquot plays large role in fiscal year 0 Determination of how the government will spend has a lot of political ties to it apart from recessionaryinflationary concerns Large of expenditures are not flexible and very hard to change in general Automatic Stabilizers Social insurance unemployment benefits social security etc Progressive tax systems 0 Burden of tax lightened with any decrease in income tax bracket falls Inflation Defined as a general price increase Inflation Benefits 1Debtors with outstanding loans Moderating Gains and Losses 2Those who are able to adjust their prices prior to inflation Have banks tie mortgage rates to inflation rates Inflation Incurs Costs to Costofliving adjustments 1Creditors loaning out funds 2People on fixed income welfare retirement etc Inflationarv Distortions Inaccurate predictions are the cause of damage when inflation occurs Investments will become more shortterm due to uncertainty about the quantity of inflation 0 Land is generally a safe investment because it retains good value over time Savings will decrease because interest on savings may not keep up with inflation rates Ie Real interest rates for savings accounts will be negative so it39s better to spend than to save in order to get as much bang for your buck in the moment Illusory profits may occur 0 Firms don39t expect future price increases costs to them as inputs to produce and have a net profit less than expected 0 Most prevalent in the investments that firms make for example new equipment that will need to be replaced in ten years will be more expensive than the same model of original equipment because of inflation Illusory profits come about when firms do not consider this increase in cost Examples of the Causes of Inflation MV PQ 0 When V and Q are constant 0 If money supply increases so do prices o Inflationary gaps Government budget deficit that is financed by the central bank Downward stickiness of prices 0 Some products do not decrease in price at best they may stay the same o Phillips curve 0 The greater the rate of unemployment the smaller the inflation 0 Full employment will always be sought and this leads to inevitable inflation Servicessector inflation o Rorvinoq cannot th r QAQQ much ih nrndnnt ivitv the camp https onenoteoffi ceapps ivecomoonenoteframeaspxF i SD F483C578388F D48D 413ampH em ul ampC 5810D M 2 SKY WACWSH ampui en U Samprsen U S 13 10162015 OneN ote Online scllccs LLLLLLLLLLLLLLLLLLLLLLLLL n plouuclly c same way goodssectors can so when inflation occurs the service sector must inflate Inertial inflation 0 When all people fight for shares of the economy and it is resolved by granting price and wage increases sanctioned by increasing the money supply Budget deficit with a money supply increase is likely the most immediate cause of inflation SuleVSide Economics Too much regulation by the government stifles economic growth High taxes destimulate work savings and investment Presence of government is wasteful by nature because there is no threat to their revenue as compared to private firms because their revenue comes straight from taxes 0 Essentially this concept points out that the lack of competition leads the government to be indifferent towards the efficiency of it39s work Crowding out 0 Government spending is financed by borrowing or bond sales this quotcrowds outquot private sectors from the bond market and loanable funds market since interest rates for loans will increase when the government starts borrowing more also the government may have better offers for bonds than the private sector so demand for private bonds would go way down Too much welfare reduces the incentive to work The Laffer Curve To increase government revenue we must decrease taxes 0 Essentially this curve states that once taxes decrease more people will acquire higher paying jobs and therefore have more taxable income 10096 l1H1M1 ProfanWVE 096 llrm Revenues Balances of Payment Account Provides statement of financial transactions of the world 0 Current account Summary of trade in goodsservices import export 0 Capital account Flow of capital changes in domestic and foreign assets nonfinancial assets for example land and other physical entities 0 Official reserves Exchange of governmental private and foreign financial assets including precious metals foreign investments and in this case also land some capital assets are also financial assets however financial assets are not considered capital assets consider rectangle v square financial v capital Quick note on exchange rates if currency in USA appreciates relative to another netexports for the USA will decrease https onenoteoffi ceapps ivecomoonenoteframeaspxF i SD F483C578388F D48D 413ampH em ul ampC 5810D M 2SKY WACWSH ampui en U Samprsen U S 23 10162015 OneN ote Online https onenoteoffi ceapps ivecomoonenoteframeaspxF i SD F483C578388F D48D 413ampH em ul ampC 5810D M 2SKYWACWSH ampui en U Samprsen U S 33