Video 9:
When comparing MMG, LFG, and AD-AS curve graph, they all correlate one way or another typically if one shifts to the right all of them shifts to the right. Lets say that in the MMG the government increases the demand in money- which shifts to the right-, when looking at LFG- which also increases the quantity in loanable funds, it shifts to the right, and in the AD-AS graph, the AD increases- also shifting the graph to the right. The change in the supply of money is equal to the change in the value of money. The fisher affects says that if prices increase then the other supply of money increases, and vise versa.

Video 1:
 There are three types of money including commodity, representative and fiat money. The one that is in use right now is fiat money meaning that money is backed up by the government's word that it has value. There are many complications with the rest, such as with representative- money backed up by a certain amount of gold and/or silver- these metals can change value and directly impact our economy. Money also has three uses. There is the use of medium of exchange, store of value and unit of account.

Video 3:
The money market graphs have their Y-axis labeled as a lower case "i" representing the interest rate. The X-axis is labeled as commodity. The graph will slope upward if the price is low and demand high and it will slope downward if vise versa.  The graph is vertical because it is not varying and because it is fixed by the FED. The MMG will shift left or right depending on the demand for money unless changed by the FED. The only way to change the supply of money is for the government to increase or decrease during inflation or recession.

Video 4:
During the money policy, there are two options: expansionary money, which is referred to as easy money, and contractionary money, also known as tight money. The first money part is Reserve Requirement in which they lower money supply during expansionary and raise with contractionary. With discount rate, the FED will lower during expansionary and ride with contractionary. With expansionary, the FED will buy bonds and with contractionary the FED will sell bonds.

Video 7:
With the loanable funds graph, price is on the Y-axis and quantity of funds is on the X-axis. Demand for loanable funds is downward sloping, and supply for loanable funds is sloping upwards. Supply for loanable funds is dependent on savings and it will increase when people have an incentive to spend money and decrease when people want to save their money. If the government is running a deficit, that means the government is demanding money and the demand for loanable funds will increase.

Video 8:
Money crearion process consists of two parts. The first on is the money multiplier and second is multiple deposit expansion. During the money creation process governments create money by making loans. This increase is from the multiple deposit expansion which affects the entire banking system but it is only a potential increase. The reserve requirement, for example, is 20% and the loan amount is $5600, the total amount created is $2500 using (1/RR X loans).

Unit 3: 02/29/16

Fiscal Policy

-Changes in expenditures or tax revenues of the federal government.    

 There are two TOOLS of fiscal policy:

Taxes- government can increase or decrease taxes.

Spending- government can increase or decrease spending.                                                                                                                                                                                                                                      

Deficits, Surpluses, & Debt

Balanced budget                                                                                                                               Revenues = Expenditures.

Budget deficit                                                                                                                                     Revenues < Expenditures.

Budget Surplus                                                                                                                                 Revenues > Expenditures.

Government debt                                                                                                                              

 Sum of all Deficits - Sum of all Surpluses.

Government must borrow money when it runs a budget deficit.

Government borrows from:                                                                                                                       -Individuals                                                                                                                        

-Corporations                                                                                                                                               -Financial Institutions                                                                                                                      Foreign Entities or Foreign Government                

Fiscal policy has only two options:

Discretionary fiscal policy (action)                                                                            

-Expansionary Fiscal Policy (think deficit) 

-Contractionary fiscal policy (think surplus)

Non-Discretionary fiscal policy (no action)

            Discretionary v. Automatic Fiscal Policy (Also known as Non-Discretionary)

Discretionary Fiscal Policy                                                                                                                         - increasing or decreasing Government spending and / or Taxes in order to return the economy to full employment. 
- Discretionary policy involves policy makers doing fiscal policy in response to an economic problem.

Automatic Fiscal Policy                                                                                                                               -Unemployment compensation and marginal tax rates are examples of automatic policies that help mitigate the effects of recession and inflation. 

Automatic fiscal policy takes place without policy makers having to respond to current economic problems.

Expansionary ("EASY") fiscal policy

Combats a recession 

Taxes decrease government spending decrease

Contractionary ("TIGHT") Fiscal policy

Combats Inflation

Government spending decrease, taxes increase

 Automatic or Built in stabilizers

• Anything that increases the governments budget deficit during a recession and increases its budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policymakers. 
• Like transfer payments 

examples include... 
Social Security
Medicaid, Medicare
VA benefits e.t.c
Unemployment 

 Tax Structures

Progressive Tax System                                                                                                                             - Average tax rate (tax revenue/GDP) rises with GDP.

Proportional Tax System                                                                                                                               - Average tax rate remains constant as GDP changes.

Regressive Tax System                                                                                                                                 - Average tax rate falls with GDP.

                                                                                 

Unit 3: 02/25/16

Consumption

Disposable Income (DI)

• Income after taxes on net income  (DI = Gross Income - Taxes)

There are 2 choices:

• with disposable income, households can either...

- consume (spend money on goods and services)

- save (not spend money on goods and services)

Consumption

• household spending 

• the ability to consume is constrained by...

- the amount of disposable income

- the propensity to save 

Do households consume if DI = D? 

Yes!

- Autonomous Consumption

- Dissaving 

Savings 

• households not spending 

- the ability to save is constrained by the amount of disposable income 

- the propensity to consume 

• Do households save if DI = D?

No! 

Averse Propensity and Average Propensity to Save 

• APC + APS = 1

• 1 - APC = APS

• 1 - APS = APC

• APC > 1 : Dissaving

• -APS : Dissaving 

MPC -Marginal Propensity to Consume 

- the fraction of any change in disposable income that is consumed.

MPC = change in consumption divided by change in disposable income

MPS -Marginal Propensity to Save 

- the fraction of any change in disposable income that is saved. 

MPS = change in savings divided by change in disposable income 

Marginal Propensities 

• MPC + MPS = 1

• MPC = 1 - MPS

• MPS = 1 - MPC

- people do two things with their disposable income, (CONSUME IT OR SAVE IT!)

The spending multiplier effect 

- an initial change in spending ( C, Ig, G, Xn) causes a larger change in aggregate spending or aggregate demand (AD)

- multiplier: change in AD divided by change in spending

Calculating the spending multiplier 

- the spending multiplier can be calculated from the MPC or the MPS. Multiplier= 1 divided by 1 - MPC or 1 divided by MPS

- multiplier are (+) when there is an increase in spending and (-) when there is a decrease

Calculating the tax multiplier

- when the government taxes, the multiplier works in reverse. Why??

• because now more is leaving the circular flow...

- tax multiplier (it's negative)

Formula = MPC divided by 1 - MPC or -MPC divided by MPS

• if there is a tax cut then the multiplier is (+), because there is now more money in the circular flow.

Unit 3: 02/22/16

Investment Demand Curve

What is the share of investment demand curve?

-downward sloping 

Why?

• when interest rates are high, fewer investment are profitable. When interest rates are low, more profitable investments.

Shifts in Investment Demand (ID)
• lower cost shift ID ->
• higher cost shift ID <-

Business Taxes
• lower business taxes shift ID ->
• higher business taxes shift ID <-

Technological of Change
• new technology shifts ID ->
• lack of technological change shift ID <-

Stock of Capital 
- if an economy is low on capital then ID   ->
- if an economy has much capital then ID <-

Expectation 
- positive expectation shift ID ->
- negative expectation shift ID <-

Classical Range v. Keynesian Range

Classical

• competition is good

• the invisible hand (the market will fix itself no government intervention)

Long-run

-- Economy will balance at full employment!!

• trickle down effect ( help the rich first and the everyone else second )

• economy is always close to or at full employment 

Keynesian

• competition is flawed 

• AD is the key not AS

• leaks and savings cause recession 

• ratchet effect & sticky wages block Say's law

• in the long-run we are all DEAD! 

Unit 3: 02/22/16

Investment Demand

What is Investment?
• money spent on expenditures on...
- new plants (factories)
- capital equipment (machinery)
- technology (hardware and software)
- new homes 
- inventories (goods sold by producers)

Expected rate of returns 
• how does businesses make investment decision? 
Answer: cost and benefit analysis
• how does business determine the benefit?
Answer: expect rate of return (outflows, inflows)
• how does business count the cost?
Answer: interest cost
• how does business determine the amount of investment they undertake?
Answer: compare expected rate of truth to interest cost
• if expected return > interest cost, then you'll invest 
• if expected return < interest cost, the do not invest 

Real (r%) v. Nominal (i%) 
- what is the difference? 

• nominal is the observable rate of interest. ( real subtract out inflation (n%) and is only known. (example: post facto)
How do you compute the real interest rate? 
• r% = i% = pi%

Why then determines the cost an investment decision? 
- interest cost minus the real inherit rate (r%)  

Unit 3: 02/19/16

Full Employment

Equilibrium exists where AD intersects SRAS & LRAS same point.

Recessionary Gap

• a recessionary gap exists when equilibrium occurs below full employment product.Inflationary Gap


Inflationary Gap

• an inflationary gap exists when equilibrium occurs beyond full employment output.


Nominal Wages v. Real Wages (& Sticky Wages)

Nominal wages: the amount of money reviews by a worker per unit of time. (Hour, day) 

Real wages: the amount of goods and services a worker can purchase with their nominal wage... (Purchasing power of your nominal wage)

Sticky wages: nominal wage level, that is set according to an initial price level. ( does not vary due to labor contacts and other restrictions)

Unit 3 02/18/16

Aggregate Supply

The level of real GDP (GDP r) that firms will produce at each price level (PL).

Long run vs. Short run

Long-run: is the period of time where input prices are completely flexible and adjust to changes in the price level.

•  in the long-run, the level of real GDP supplied is independent at the price-level.

Short-run: is the period of time where input prices are sticky and do not adjust to changes in the price level.

• in the short-run, the level of real GDP supplied is directly related to the price-  level.Long-run

Long Run Aggregate Supply (LRAS)

•  LRAS marks the level of full employment in economy(analogous to PPC)
•  Because input prices are completely flexible in the long-run, changes in price level do not change firms real profits and therefore do not change firms' level of output. 
• This means that the LRAS is vertical to the economy's level of full employment. 
• Full employment: FE/YF/ Y*

Changes in SRAS

• an increase in SRAS is seen as a shift to the right SRAS ->
• a decrease in SRAS is seen as a shift to the left SRAS <-

*The key to understanding, shift in SRAS is per unit cost of production.

• Per unit cost of production = Total input cost divided by total output 

Determinants of SRAS

1. Input prices
2. Legal Institutional Environment 
3. Productivity

(1.)Input Prices 

• domestic resource prices 

- wages (75 percent of all business costs)

- cost of capital (expenses)

- raw materials (commodity prices)

foreign resource prices 

market power 

- increase in resources prices = SRAS <-

- decrease in resources prices = SRAS    -> 

(2)Productivity 

Productivity = total output divided by total input 

• more productivity = lower unit production cost = SRAS ->

• lower productivity = higher unit  production cost = SRAS <-

(3)Legal Insitutional Environemt

• Taxes ($ to government) on business increase per unit production cost = SRAS <-

• Subsidies ($ from government) to business reduce per unit production cost = SRAS ->

Government Regulation 

- government regulation creates a cost of compliances = SRAS <-

- deregulation reduced compliances cost = SRAS ->

Unit 3: 02/12/16

Aggregate Demand Curve (total)

Demand by consumers, businesses, government, and foreign countries. 

What doesn't shift the curve? 

Changes in price level cause a move along the curve.

AD= C+Ig+G+Xn

Why is AD downward sloping? 

1. Real balance effect- Higher price levels reduce the purchasing power of money. - This decreases quantity of expenditures. - Lower price levels increase purchasing power and increase expenditures. 
2. Interest rate effect- When price level increases, lenders need to charge higher interest rates to get a REAL return on their loans. -Higher interest rates discourage consumer spending and business investment. Why? 
3. Foreign trade effect- When US price level rises, foreign buyers purchase fewer US goods and Americans buy more foreign goods.                                                                     -Exports fall and imports rise, causing real GDP to fall (Xn decreases) 

Shifters of aggregate demand 

GDP= C+Ig+G+Xn

*There are two parts to a shift in AD

1. A change in C, I, G, Xn
2. A multiplier effect that produces a greater change than the original change in the 4 components.

• Increase in AD = AD ->

• Decrease in AD = AD <-

Increase in AD

Decrease in AD

Determinants of AD

1. Consumption

   Consumer Wealth 

• more wealth= more spending AD ->
• less wealth= less spending     AD <-

Consumer Expectations 

• positive expectations = more spending AD shifts ->
• negative expectations = less spending AD shifts <-

Household Indebtedness 

•  less debt = more spending AD shifts ->
•  more debt = less spending AD shifts <-

Taxes

• less taxes = more spending AD shifts.   ->
• more taxes = less spending AD shifts <-

2. Gross Private Domestic Investment

 Investment spending is sensitive to:

 

-The real interest rate

•  lower real interest rate = more investment AD shifts ->
•  higher real interest rate = less investment AD shifts <-

-Expected Returns 

•  higher expected returns = more investment AD shifts ->
•  lower expected returns = less investment AD shifts <-

Expected returns influenced by: 

- Expectations of future probability

-Technology

-Degree of excess capacity (existing stock of capital)

-Business Taxes

3.Government Spending 

• more government spending (AD shifts  ->)
• less government spending (AD shifts  <-)

4. Net exports 

Are sensitive to: 

- Exchange Rate (International value of $)

• strong $ = more imports and fewer exports = AD shifts <-
•  weak $ = fewer imports and more exports = AD shifts ->

-Relative Income 

• strong foreign economies = more exports = AD shifts ->
• weak foreign economies= less exports = AD shifts <-