10 Macro Last Min. Notes Flashcards
Who controls Monetary Policy
The fed
What does Monetary Policy change
- Res. Req.
- Fed. Funds/Discount Rate
- Open Market Ops
- Interest Rates
Monetary Policy impact on graph
LFM: Supply
MM: Supply
Monetary Policy impact on AD
C, Ig, Xn
Monetary Policy side effects
none
Who controls Fiscal Policy
Congress
What does Fiscal Policy change
G spending
Personal income tax
Fiscal Policy impact on AD
C, G
Fiscal Policy side effects
crowding out
Explain crowding out
- Demand in LFM +
- Supply in LFM —
- Interest rate +
- Ig –
- AD –
Types of Non-Discretionary
“Automatic”
Progressive Tax system
Transfer Payments
Que es Progressive Tax system
Reduce Tax in Recession
Increase in D-P
Que son Transfer Payments
Welfare
Side effects of Non-Discretionary
G deficit in recession
G surplus in D-P
Regressive Tax system
poorest pay highest %
- Sales tax
- Consumption tax
Proportional Tax system
Equal everyone
- Soc. Sec.
Staglflation
Reaganomics
- Shift SRAS to right
- Decr. PUP/Biz. Tax
- Trickle down (decr. tax on rich)
- Laffer curve
work, save and invest
Reaganomics
- Laffer curve
- Cutting tax will increase incentive to work!
- Decrease tax
- Since working, more $$ in bank
- Supply +, Int. rate +
Less tax rev. due to a progressive tax system is what kind of tax
- non-discr.
- expansionary
- counter-cyclical
Equilibrium Int. Rate Inctr. in LFM what effects to Ig
Only move up on demand of Inv. Demand graph. Quantity decreases (Crowding out)
Tariff
tax on imports
Quota
how much can enter
Embargo
ban
When ¥ strengthens compared to $, good wise…
J ppl can buy more A stuff
- Imports +, Exports –
- Xn –
Interest Rates and International: think…
BONDS
ppl want BONDS with higher interest rates
Relationship b/w Xn and IR
inverse
- If other countries are doing well, they want your stuff
- Want prosperous trade partners
What changes PL
G spending incr, +
World-wide craze for domestic good (Xn+)
Domestic optimism + (C, Ig +)
Interest rates +, PL –
Why does Biz Tax + PL effect not be determined
SRAS go Left
AD go left
Both graphs shift but cannot determine how much
For ∆ PL to be most effective for ∆GDP,
SRAS flat part
super bad economy
Steeper AS curve, greater or weaker expansionary effect?
weaker
Printing $$s can…
- amplify expansionary effect of budget deficit
- neutralize crowding out
Reserve Requirement
%
ment-percent
Jobs of The Fed
Issuing currency Setting RR and holding Reserves Lending to Banks Clearing Checks Acting as Fiscal Agent Supervising Banks Controlling $ supply (Monetary Policy)
Monetary Policy Expansionary
RR
Fed. Funds/Discount Rate
OMO
Moral Succession
down down buy the water
Monetary Policy Contractionary
RR
Fed. Funds/Discount Rate
OMO
Moral Succession
up up sell tight
Fed. spending $ creation go into what?
LFM
G incr, # of LFM +
M1
Currency
Demand deposit
Debit card (not credit card)
M2
M1 + Total supply of $$ in country
What they usually have in Money Market graph
saving accounts
M3
M2 + larger CDs
What are not $$
credit cards ( a loan) Resources
Advantages of Monetary Policy
Faster
Not as political
No crowding out effect (∆ in interest rates are intended)
Effective interest rate= Yield=
Coupon amount/Price paid
When stock market is going well, want to sell or buy bonds?
sell to get cash
When demand for bonds increases, what happens to yield?
bonds +
Prices +
Yield –
Money Market graph Demand shift Right
When GDP +, ppl want more stuff
When PL+, need more $ to buy
Monetary Policy is most effective when..
Demand for LF is steep
Ig is flat
What shifts the supply in Money Market
The Fed through lending habits of banks
Velocity of $ means?
Average # of times each dollar is spend on final goods and services in a year
Income: Land Capital Labor Entrepreneurial Ability
Rent
Interest
Wages
Profit
Command economy AKA
Communism
Normative Economics
Analyze data
Opinion
Positive Economics
Just gather data
facts
Accounting cost (explicit)
material labor energy
Economic cost (implicit)
.opportunity cost
LFM graph is keeping it real with what
Inv Demand graph
Effects on Exchange $ markets with PL + in Japan
Demand of USD +
Credit
$ entering country
Debit
$ leaving country
Current account
Records imports/exports of goods and services
Exports - inpayments- credit
Import - outpayments- debit
Financial account
Flow of $ sale/purchase of Realestate Capital Financial capital Foreign financial capital
Balance of Payment Surplus
“ Deficit
Net result of the Current AND Financial accounts
Official Reserves Account
Balances out discrepancies between Current account and Financial account
Product Market
Demander: households
Supplier: biz
Resource Market
Demander: biz
Supplier: household
Injections
Investment
Government spending
Exports
Leakage
Savings
Taxes
Imports
Gross Investment (Ig)
Total spending on capital goods (by biz)
Net Investment (In)
Total net additions to the stock of capital goods
Net investment =
Gross investment- Capital Consumption Allwance
Capital consumption allowance
The amount of money a country has to spend each year to maintain its present level of economic production.
Inventory
Goods produced but not yet sold
∆inventory is counted in gdp
Not counted in GDP
Housewife work Intermediate Trans Public Transfer Payments (welfare) Private Transfer (donation) Security Transaction (stocks and bonds)
Negative Net investment means
Depreciation> gross Investment
Stock of cpaital is going down
Find Nominal GDP Expenditures method
C + Ig + Xn + G
Find Nominal GDP Income method
wages + rent + interest + profit + ind. biz tax + CCA
Okun’s Law
For every 1% that actual unemployment exceeds hte Natural, a 2% loss of GDP is generated
Who does unexpected high inflation hurt?
fixed income ppl
Retired people
Who does unexpected high inflation benefit?
Fixed expenditures (rent) Fixed inflation rate (loan)
Who does variable interest loan protect?
creditor (lender)
Rule of 70
70/% annual change= # of years to double
COLA
Cost of Living Adjustment
Protection against inflation
If J got $1000 last year and COLA was 4%, he’ll get $1040
Classical Economies
Smith
Say’s Law
Say’s Law
Classical economies
Supply creates its own demand
wage flexibility is important
Keynesian Economies
John Mayred Keys More G involvement to stabilize economy Believe Recessions are caused by excessive savings (which decreases AD) Prevent slumps through AD control Focus on short-term
Rational Expectation Theory (think w graph)
People are smart and aware
G should keep out
People will ask for raises when they see PL +
AS - (cuz PUP +)
AD + (cuz C +)
Therefore PL increases but GDP stays the same
Adaptive Expectation Theory (think w graph)
Adapt expectations on past ONLY
Ignore G’s plans always on past
If AET is true.. Expansionary will…
GDP
Wages
SRAS
GDP +
Wages +
SRAS –
If RET is true.. Expansionary will... GDP PL Wages SRAS
GDP no ∆
PL +
Wages +
SRAS –
Crowding out effect deficit can be avoided by
printing $$
Budget deficit has greatest expansionary effect when…
financed by newly printed $
When G purchases bonds, the $ the bank attained is…
all excess reserves
If the Fed sells Bonds on OMO
Supply of LF
Interest rate
LF: Increase
Interest rate: decrease
PPC curves assum
All resources and technology: fixed
All resources : fully-employed.
Disinflation
When an economy experiences a lower inflation than the last year
Largest component of expenditure
Consumption
Improved schools will affect AS AD Real GDP PL
AS +
AD+
Real GDP +
PL CBD
A Government program increases the incentive for banks to lend more money.
# of LF + ---> RIR -- ---> Ig+ --> AD PUP is not affected. Therefore AS constant GDP and PL +
What would decrease investment demand
cost
Better technology
Aggregate Supply +
Aggregate Demand +
Real GDP +
PL:l can not be determined.
If a country runs a deficit, mostlikely will fund with
selling G bonds
