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Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
Unit 5 econ
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Unit 5 econ

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  • Use pg. 151 of notebook guide and 177 of procedures manual of Econ alive.
  • Most common measure of money supply is M1 – currency (coins & paper money), checking accounts (demand deposits), & T-Checks (buy checks to use as cash for money ready for spending) ALL ASSETS THAT CAN BE USED OR CONVERTED TO CASH QUICKLY M2 is broader classification of money – money not as easily accessible like savings accounts/funds (near-money)Credit cards are not moneyWhy look at money supply? – forecast inflation, demand, investment, business, etc. (greatly influences what happens in the economy)
  • With every deposit, there is an increase in the lending power of the bankThus, the monetary value of one deposit will have lending power well beyond its value
  • #1 Answer = $4,000#2 Answer = $1,500
  • Answer = $30,000
  • Holding reserves – holds the reserve requirement for banksProviding cash (when funds are low due to withdrawals) & loans (discount rate)Clearing checks – transfer funds from one account to another (from your account to the store’s account you bought something from)
  • Critic of Keynes who argued that the Great Depression was not because of a lack of demand, it was a drop in the money supply between 1929 & 1933 as banks failed and wiped out the accounts of depositors. As $ supply shrank people stopped spending = falling prices, rising unemployment & business failure, & declining incomesBelieve we should used monetary policy or in this case the Fed should have expanded the $$$ supply during depression so with more money in circulation spending would have picked up & expansion would have ensued
  • GOAL IS TO INCREASE MONEY SUPPLY FAST ENOUGH TO KEEP UP WITH GROWTH BUT NO FASTER!Easy money – consumers spend too much, increase in demand causes demand-pull inflationTight money – deflation results with low levels of investment & spending
  • Required to get quick loans if they don’t have enough reservesWhy this rate? = easiest rate to change using OMO, affects interest rates for mortgages/credit cards/savings accounts/bonds
  • The FOMC Policy Decision"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability."Again, the FOMC opted for no change in the target federal funds rate, essentially repeating the March policy statement. 'The fed funds rate can't be used effectively to help the member banks, who borrow reserves at the fed funds rate from other member  banks. With the target so low, monetary policy, especially open market operations, is not an effective stimulatory tool. 
  • Economic performance can be illustrated through the concepts of aggregate supply and aggregate demand. LAW OF SUPPLY - It is upward-sloping because at higher prices firms have an incentive to produce more, and at lower prices they are likely to produce less.LAW OF DEMAND - It is downward-sloping because at higher prices, consumers, firms, government, and foreign customers are less willing to buy, while they will likely buy more at lower prices. Shifts in the aggregate supply and aggregate demand curves can illustrate changes in the performance of our economy. If consumer confidence in the economy falls and people reduce their spending, aggregate demand can fall, reducing real output and prices and possibly dropping the country into a recession. However, if the money supply is too large, excessive consumer demand can push up the aggregate demand, raising real output and prices and possibly pushing the country into serious inflation.
  • Keynes recommends that,during periods of recession, Congress should increase government spending in order to “prime the pump” of the economy. At the same time, he recommends, Congress should decrease taxes in order to give households more disposable income with which they can buy more products. Through both methods of fiscal policy, the increase in aggregate demand stimulates firms to increase production, hire workers, and increase household incomes to enable them to buy more.Economists generally look to annual goals of GDP growth of 2.5-3 percent, an inflation rate of 3-4 percent, and an unemployment rate of approximately 5 percent for stable economic growth. However, our economy generally follows an economic cycle of recession and expansion every few years. As John Maynard Keynes argued in his 1936 book General Theory of Employment, Interest, and Money, nations need not wait for potential economic problems to correct themselves. He advocated that government take an active role in resolving economic issues through the use of two policies: fiscal policy and monetary policy. (classical theory says that market/economy will correct itself)
  • The demand for money consists of consumers borrowing for such items as cars and homes, firms borrowing for such items as factories and equipment, and the government borrowing to finance the national debt. The supply of money is set by the Federal Reserve Board of Governors, the central banking system for the United States. The supply and demand for money determine the interest rate that must be paid for the use of borrowed money. So if the Federal Reserve increases the money supply, interest rates will fall, making it less expensive to borrow money. In that case, those wishing to borrow money will be more likely to do so-- and be more likely to spend that money on products. If the Federal Reserve reduces the money supply, interest rates will rise, so less will be borrowed and spent (because of the higher cost of borrowing).
  • Expansionary - economy is sliding into recession, need to stimulate economyExample of expansionary – issue stimulus checks/tax rebates, increase gov’t purchases of goods/servicesContractionary – economy is overheating, buyers are demanding more than what can be produced, prices rising, etc.
  • Demand-Side Policies - believe best way to deal with sluggish economy is to stimulate demand by cutting taxes (consumers buy more) & spending more (stimulus check) which gets businesses going again-business/investment sector is cause of instability in OE model, ended up causing magnified impact on other spending-government can step in to offset changes in investment sector spending (ex. Lower taxes and enact other measures to encourage businesses & consumers to spend more)-major example of this policy is deficit spending-when economy recovers, tax collections rise, and gov’t would have surplus to pay back debt-idea is that gov’t spends to make up for I sector ‘s lack of spending but then should stop when I sector recovers-use automatic stabilizers (programs that trigger benefits if changes in economy threaten people’s incomes) such as unemployment insurance & federal entitlement programs (welfare, pensions, medicare, Social Security)Supply-Side Policies- stimulate output by cutting taxes, as businesses & investors have more money then supply will increase, spurring economy (leads to more income to workers then more demand)GOV’T MUST CONSIDER BOTH APPROACHES WHEN DEVELOPING THEIR ECONOMIC POLICY!!!
  • 1,000 spent by gov’t to provide income to teen for making trails in public parkTeen saves $300 and spends $700 on bicycleShop owner saves $200 and spends $500 on car repairsMechanic saves $100 and spend $400 on a painter to paint his fenceAlso SAVINGS turns into loans!Stabilizers during bad economyDemand drops and businesses lay off workers in recessionWorkers earnings decline so lower tax bracket and slowed business does the sameWorkers start getting unemployment benefits, welfare payments, and food stamps to encourage spending and to help improve economy
  • Why?– societies not always able to measure benefits & persons with higher incomes suffer less discomfort paying taxes than persons with lower incomesAtPay – Income tax, luxury itemsBenefit – people who drive should pay for highway system (tolls & gas taxes)
  • Progressive operates under ability-to-pay principle & puts greater tax burden on the wealthy than on the poor, is this fair though? (does it punish those who work, save, & invest?
  • Federal Gov’t receives most revenues from individual income taxes, corporate income taxes, & SS taxesStates & Fed Gov’t issue progressive income taxesSales – proportional that turns regressive but to limit the progressive effects governments do not tax necessities such as food & medicineSocial Security – tax on wages a company pays its employees (company pays half & employee pays half for total of 12.4%)Medicare – split for company & employee for total of 2.9%, no cap which makes it a true proportional taxCorporate Income tax – applied to profits of corporations, they are progressiveUnemployment tax – state payroll tax used to assist workers who lose their jobsProperty tax – for land, buildings, & sometimes personal property like cars and boats (they are proportional taxes on assessed value) – these pay for public schoolsExcise – levied on goods/services that the gov’t wants to regulate (generally regressive), ex. Such as cigarettes & alcohol called sin taxesLuxury taxes – levied on sale of luxury goods like fur goat or private jet, progressive b/c consumption increases as income increasesEstate tax (fed gov’t) & inheritance tax (state gov’t) – on assets left to heirs if someone dies, are progressive because larger estates are taxed at a higher rateBoth the federal and state governments levy excise taxes on goods such as alcohol, motor fuel, and tobacco products. Even though federal excise taxes are geographically uniform, state excise taxes vary considerably. However, taxation constitutes a substantial proportion of the retail prices on alcohol and tobacco products.Local governments may also impose an excise tax. For example, the city of Anchorage, Alaska charges a cigarette tax of $1.30 per pack, which is on top of the federal excise tax and the state excise tax.Investopedia explains Regressive TaxSome examples include gas tax and cigarette tax. For example, if a person has $10 of income and must pay $1 of tax on a package of cigarettes, this represents 10% of the person's income. However, if the person has $20 of income, this $1 tax only represents 5% of that person's income.Sales taxes that apply to essentials are generally considered to be regressive as well because expenses for food, clothing and shelter tend to make up a higher percentage of a lower income consumer's overall budget. In this case, even though the tax may be uniform (such as 7% sales tax), lower income consumers are more affected by it because they are less able to afford it.
  • Federal Gov’t receives most revenues from individual income taxes, corporate income taxes, & SS taxesStates & Fed Gov’t issue progressive income taxesSales – proportional that turns regressive but to limit the progressive effects governments do not tax necessities such as food & medicineSocial Security – tax on wages a company pays its employees (company pays half & employee pays half for total of 12.4%)Medicare – split for company & employee for total of 2.9%, no cap which makes it a true proportional taxCorporate Income tax – applied to profits of corporations, they are progressiveUnemployment tax – state payroll tax used to assist workers who lose their jobsProperty tax – for land, buildings, & sometimes personal property like cars and boats (they are proportional taxes on assessed value) – these pay for public schoolsExcise – levied on goods/services that the gov’t wants to regulate (generally regressive), ex. Such as cigarettes & alcohol called sin taxesLuxury taxes – levied on sale of luxury goods like fur goat or private jet, progressive b/c consumption increases as income increasesEstate tax (fed gov’t) & inheritance tax (state gov’t) – on assets left to heirs if someone dies, are progressive because larger estates are taxed at a higher rateBoth the federal and state governments levy excise taxes on goods such as alcohol, motor fuel, and tobacco products. Even though federal excise taxes are geographically uniform, state excise taxes vary considerably. However, taxation constitutes a substantial proportion of the retail prices on alcohol and tobacco products.Investopedia explains Regressive TaxSome examples include gas tax and cigarette tax. For example, if a person has $10 of income and must pay $1 of tax on a package of cigarettes, this represents 10% of the person's income. However, if the person has $20 of income, this $1 tax only represents 5% of that person's income.Sales taxes that apply to essentials are generally considered to be regressive as well because expenses for food, clothing and shelter tend to make up a higher percentage of a lower income consumer's overall budget. In this case, even though the tax may be uniform (such as 7% sales tax), lower income consumers are more affected by it because they are less able to afford it.
  • Here's what's going on:In 2007 and 2008, US government tax revenues averaged about $633.15 billion per quarter. For the first quarter of 2009, however, the numbers just in tell us that tax receipts totaled only about $442.39 billion – a decline of 30%. Looking to confirm the trend, we compared the data for April – typically the big kahuna of tax collection months – to the 2007-2008 average, and found that individual income taxes this year were down more than 40%. The situation is even worse for corporate income taxes, which were down a stunning 67%. f the shortfall in individual and corporate tax revenue persists – and we expect it will – then the deep hole the government is already digging for itself will be that much deeper. Using the government's own expense projections, the revenue shortfall, even if it doesn't worsen further, would push the fiscal 2009 budget deficit up to about $1.958 trillion. Case in point, in January the government projected a $1.2 trillion deficit for fiscal year 2009...in March, just three months later, they upped the projection to $1.8 trillion. That $600 billion "adjustment" alone totaled more than any full-year budget deficit in the nation's history.
  • payments to disadvantaged like SS, welfare, unemployment, & aid to handicap), include payment for highways to states (grant-in-aid) or subsidies to individuals or businesses to protect/promote economic activity (ex. Farmers)
  • Debt is money owed while Deficit is spending more than you take in (debts are a result of deficit spending & debts are accumulated over years of time) If we add up all federal bonds & other debts, we have a measure of federal debt (total amount borrowed from investors to finance deficit spending)
  • http://www.politicsrealm.com/images/obama-deficit.jpg
  • That's because the Treasury is buying toxic investments (mortgage bonds, credit-card loans and so on) and putting them on the books with a higher value than the market is willing to assign.While that makes the budget deficit appear smaller, it doesn't negate the fact that the government still must borrow the money needed to buy the toxic paper in the first place. The additional revenue shortfall means they have to raise that much more money. Based on the struggle they had pushing the $14 billion in long-term notes at the latest auction, it becomes increasingly apparent that when push comes to shove, the only way the government is going to come up with the money needed to meet its aggressive spending is to print it up. We also believe that inflation could start setting in as early as Q3 of 2009 and will accelerate sharply by 2010. Treasury Rates will start climbing and the era of cheap money will end, making it harder for overleveraged consumers, businesses, and governments to service their debt.
  • In Keynes model, sometimes gov’t has to step in & stimulate demand or supply therefore making expenditures is necessary -we can always borrow more & lowering deficits lowers the demand for money (raise interest rates)
  • -deficit adds to the national debt-countries will eventually stop lending to the U.S. & stop trusting U.S. (maybe our bonds will be downgraded to less than AAA rating)-balanced budget is bad during recession b/c it will get worse if we cut spending & transfer paymentsalso bad during boom to cut taxes & increasing spending will cause inflation-transfer of purchasing power from private to public (if gov’t wants to increase military spending then they will raise taxes therefore decreasing purchasing power of private individuals)-can change distribution of income (federal tax structure favors some classes - ex. If gov’t borrows from rich then taxes paid to make interest payments go to rich & middle class suffer)-crowding out effect = when gov’t runs deficit they need to sell bonds or somehow get money, because they are increasing demand for money interest rates rise & force private borrowers to either pay higher rates or stay out of the marketA WAY TO COMBAT CROWDING OUT - monetize the debt? Create enough extra money to offset deficit spending (increase money supply) to keep interest rates downAs gov’t borrows more, interest rates rise because credit is being competed for therefore interest rates can riseGov’t increases money supply (therefore increasing credit) to keep interest rates stable)-individual incentives – if people believe the gov’t is spending freely therefore they are taxed more, then people lose initiatives to work harder, save, and invest
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