ECN 150: Week 10 Notes
ECN 150: Week 10 Notes ECN 150
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This 3 page Class Notes was uploaded by Alexis Ibarra on Sunday April 3, 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: 04/03/16
WEEK 10 NOTES 3/30/16 ***Example 1: For the following discussion assume the only spenders of the society are consumers. According to Professor Mallon’s graph, if society is generating a level of GDP of 600 billion dollars, what is the level of consumption spending that it taking place? ANSWER: LESS THAN 600 BILLION because at a GDP of 600 billion, the consumption line is below the 45ᵒ line! What is the planned level of investment spending (business spending)? ANSWER: 0. the only spenders are consumers so business are intending to invest 0 and inventory accumulation levels are 0. The 600 billion GDP is attainable, but not maintainable because it causes inventory accumulations that businesses don’t want. (They want 0 in this society). The 300 billion GDP is not good either because it causes dispending in inventory/negative inventory but businesses want 0 so negative is not good! The level of output that is maintainable is at the point where the consumption line first pierces the 45ᵒ line. (In this example, it is a GDP of 400.) ***Example 2: For the following discussion assume the spenders are consumers and businesses want planned investment at 25 billion dollars. (Causes a C+I line) We were at a GDP of 400, now we added an I of 25. But this line intersects at 500. However, 400+25 ≠ 500! BECAUSE OF MULTIPLIER EFFECT! Multiplier effect: There’s a growth of GDP greater than the amount of infused spending. 1 The calculation of the multiplier = mps 1 In our scenario, our mps=.25, therefore our multiplier = = 4 .25 Infusion × Multiplier = ΔGDP to be realized due to infusion 25 × 4 = 100 How do businesses create that additional 25 billion dollars in the second example? Do they keep production at the same level of output from the first example? No, they have to increase their level of output. They put more people to work. This causes a jump in consumer spending because people who weren’t working in example 1 are now making more money. The company that the business buys their raw materials from, are also going to have to hire more people to produce more raw material. This is how the business accounts for an addition of 25 million dollars. The spending of the business becomes income for other businesses who were the recipient of the spending. So the 400 is actually 475 since the I increased to 25. 475+25500! 3/1/16 4/1/16 For businesses to be able to achieve their objective of an increase of 25 billion in inventory, they have to increase their production and hire more people to work. They also have to put in orders of raw materials from suppliers, who will have to also hire more people, and so on. If a bunch of people went back to work and incomes all rose by 25 billion, and the recipients of the money buried it and did not spend it, the GDP would only rise by 25, without the multiplier effect. All of the incremental numbers of consumer spending, because of the infusion, would sum total 75 billion, the same as the multiplier affect shows Not only was there an infusion, there was a stimulus to the rest of the consumption in the economy. The GDP rose much more than the initial infusion Spending Multiplier= 1/mps = 1/.25 =4 Infusion x multiplier= change in maintainable GDP Now the government is recognizing they need to spend money in order to perform their service as government They begin to create budget and introduce more spending in economy If the amount of government spending is $50B that they are infusing, the new GDP is 700 because 50x4=200, which is the change in GDP The government hires contractors, those contractors hire people to work, the contractors buy trucks, asphalt etc., and those people had to hire people to provide everything: in the end incomes in the society go up The initial infusion stimulates far more levels of spending above and beyond the initial 50 Now we have $700B of maintainable GDP, unemployment is at 12%, and this GDP actually went down 3% from the previous year. Is this acceptable? NO! Not acceptable because we need to satisfy “goals of the economy.” Increasing level of spending will fix it though GDP will grow more, more people will need to work, etc. Our society can gain a higher level of spending by either the government lowering taxes, or government spending a little more (Keynesians would say this is perfect) Fiscal Policy tax and spend decisions of the federal government Discretionary Fiscal Policy implementation of new tax and spend actions in response to an economic issue within society The USA had to do this in 2008 with the Stimulus Package because of the Great Depression The government took more definitive action, spent more than previously, taxed less so others could spend more, and spent $588B more than previously was part of budget, tax $200B less than previously to put money back in the pocket of people The downside of this is the growth in national debt= relationship between tax revenue and government spending
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