Macroeconomics Chapter 7-12

Gives us insight on our economy

5% or greater increase

When the economy shrinks by 5%

Quantity of a good demanded at a given time period increases as its price fall

Adam Smith- “Wealth of Nations” –economy affects life

1. Flexible Prices- should be able to charge whatever you want
2. Flexible Wages- pay people whatever you want
3. Says Law- Supply creates demand
4. Popular Economic school of thought- prior to the 1930’s
5. Naturally Unstable- The economy is naturally unstable

John Maynard Keynes
1. The economy is constantly in motion
2. The government intervention was good

1. Steady decline in output
2. Real GDP- 30% decrease in 1929-1933
3. 1934- some economic growth
4. 1936-37- got worse
5. 1939- had the same real GDP as it did in 1929
6. Per capita was less in 1929

1. Increase in market demand
2. Marketed the end of the depression
3. 19% incredible in the GDP by 1942
4. Full employment

When the economy slows down for two or more consecutive quarters–results in unemployment

Designed to help people who fought in the war to go on and get a college education

1. Post WW2 Recession- lasted 8 months long 4.3%
2. Lasted 16 months 12.3% unemployment rate

1. Internal Marker Forces- businesses within our economy
2. External Shocks- when something on the outside of our economy shakes up or disrupts the economy (not all shocks are good or bad)

Taxes, government spending

1. Output- should produce from year to year
2. Jobs- should be able to get a job
3. Prices- should be able to purchase goods and services at affordable prices
4. Growth- diversification/ want to have a variety for the consumer
5. International balances we want to be able to trade with other countries and we want want them to be able to trade with us

When something from within our economy shakes things up

When something happens on the outside of our economy

The total quantity of output that’s demanded at different prices and different times

The some total of output that producers are willing and able to supply at different places and at different times

1. Undesirability- When the equilibrium price or output level may not satisfy our economic goals
2. Instability- Even if the equilibrium is what you want, it may not last long

Quick fix

More permanent fix

When the government spends money in the economy

using money and credit controls to ultra the economy

the use of tax insentives and other mechanisms to increase the ability and willingness to increase goods and services

1. Consumption- Expentagers on final good and services by consumers
2. Investment- Upgrading existing equipment or buying new equipment
3. Government Spending- Anytime the government spends money in the economy
4. Net Exports- Exports-Imports

The money that we have left over after we pay our taxes

The portion of our disposable income that is not spent

The portion of total disposable income that is spent on consumer goods and services

Total Consumption/Total Disposable Income

The fraction of each additional dollar of disposable income that is spent on consumption

Change in Consumption/Change in Disposable Income

The fraction of each additional dollar of disposable income that is not spent on consumption

1-M.P.S.

change in consumer spending that is caused by a change in the own value of owned assets

things that affect what we consume and how

1. Expectations- if we think some is going to do something special we may buy something for them as well
2. Wealth Effects- If you have more money, the less careful you are going to be with it or how you spend
3. Credit- How carried away you will get with spending
4. Taxes- What we owe the government

Autonomous Consumption + Income – Dependent Consumption

The mathematical relationship that indicates the rate of desired consumer spending at various income levels

Consumption expentagers in excess of disposable income

1. Demand Poll Inflation- When the cost of goods or services go up because people are in demand of them.
2. Cost Push Inflation- When the costs go of factors of production goes up so do the prices

Where finished good are bought

Where we get our factors of production

Income that is not spent directly on domestic output but instead diverted from circular flow

1. Savings- if you choose to save some of your money
2. Imports- If you are buying something from another country it takes away from our country
3. Household Taxes- When you have to give money to the government you’re not spending it
4. Business Taxes- If businesses are paying taxes they are not spending money in the economy
5. Business Savings- If a business decides not to spend money but sets it aside

when there is addition of money to the circular flow

1. Undesired Inventory- Merchandise that you have in stock that people no longer want anymore
2. Falling Output Prices- Pay top dollar for something and the price goes down, bought it when it was expensive, but now it is cheap.

The fraction of each additional dollar of disposable income spent on consumption

Change in total consumption/change in disposable income

The multiple by which an initial change in spending will alter total expentager after an infinite number of spending cyclicles

1/1- M.P.C.

Multiplier X Initial Change in Aggregate Spending

1. Produce cut output when output exceeds demand- if people aren’t demanding something don’t produce it
2. Resulting Loss of Income- causes a decline in consumer demand- the less income people make the less people will demand
3. Declines in Consumer- spending will lead to further cut backs of production and more lost income

When there is an increase in the average prices we pay for

A brief period of inflation

Long period of inflation

When the government spends or doesn’t spend money in the economy to alter the economy (uses its own personal spending to affect the economy. If the government wants to speed up or slow down the economy)

1. Purchase more is less goods- people are more likely to spend money in the economy
2. Raises or Lowers Taxes- If the government increases taxes you will have less disposable income, less demand slows down the economy
3. Change The Level of Income Transfers- Social security or welfare benefits increase people will still be spending more money

1. Internal Market Forces- What is happening within out economy
2. External Shocks- When something on the outside of our economy shakes things up
3. Policy Tools

1. Increase in Output
2. Jobs- People should be able to find work
3. Prices- Should be able to buy goods and services
4. Growth- More diverse/ more variety
5. International Balances- Want things to go well with our trade partner

Tax cuts or government spending increases

How much do we want to speed the government up?

Amount of additional aggregate demand you will need to achieve full employment

Aggregate Demand and Short Fall/ Multiplier

1. More Consumption- can spend more on goods and services
2. More Income
3. More Savings- may have extra money you can put away

Desired Fiscal Stimulus/ M.P.C.

Take the form of tax increases or spending cuts

Excess Aggregate Demand / Multiplier

Desired Fiscal Restraint / Marginal Propensity to Consume

A reduction in private sector borrowing as a result of increases in government borrowing

the use of borrowed money to finance government expentagers that exceed tax revenue.

Yes

The amount by which the government exceeds its tax revenue

When your revenue is greater than your expentagers

A 12 month period that we use for accounting purposes

The elements of the federal budget that are not determined by legislative or executive decisions

Accounts for about 20% each yr.
-80% determined by things years ago from our government

Something like a tax increase or spending cut, used by the government if the government wants to slow down the economy

A tax cut or spending increase
– if we want to speed the economy up

Federal expentagers that automatically respond to counter cyclical changes in national income
Example: Unemployment Compensation

1. Government Spending Increases- increases through unemployment compensation, welfare, social security– costs about $2 Billion for the government.
2. Government Tax Revenue Declines- about $38 Billion in decreases
2. Deficit Increases- by $15 Billion– shrinks because there is not enough spending occurring

The portion of the budget balance that is attributed to short run changes in the economy

Cyclical Balance + Structural Balance

Federal Revenue At Full – Expentagers at full employment under fiscal or budgetary conditions

Reduction in private sector borrowing caused by an increase in government borrowing

An increase in private sector borrowing cause by decreases in government borrowing

1. Spending it on goods and services- government can buy more stuff
2. Cut Taxes- Reduce taxes people are being charged for
3. Increases- Income transfers
4. Can be used to pay of old debt

The accumulation of debt by the national government

An obligation to make future payment of debt

Anything having exchange value in the market place or wealth

1. Internal Debt- The U.S. gov. debt that is help by U.S. households and institutions
2. External Debt- The U.S. gov. debt that is held by foreign households and institutions

The issuance of new debt in payment or previous debt

The interest that is required to be paid each year on outstanding debt
debt- charged 6% on loan, what you have to pay each year

An explicit legislated limit on the size of the budget deficit– when the legislature tells the president that he cannot spend this amount

An explicit legislative limit on the amount of outstanding national debt