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This looks so cool. EL FIN. OVERVIEW. This is it!!! Fill in some gaps & details with those taking the macro AP test You’ve got the gist of macro. Start at the Beginning. Day 1 we discussed the role of the gov’t Why do they intervene in economy? REGULATE THE BUSINESS CYCLE. - PowerPoint PPT PresentationTRANSCRIPT
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This looks so cool
EL FIN
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OVERVIEW
This is it!!!Fill in some gaps & details with those
taking the macro AP test
You’ve got the gist of macro
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Start at the Beginning
Day 1 we discussed the role of the gov’tWhy do they intervene in economy?
REGULATE THE BUSINESS CYCLE
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How can they tell?
Use GDP as biggest indicatorSpent a lot of time hereReal versus nominalCIGX & WIRPGDP, GNP, NDP, NEW, etc.
Why does it really matter?
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Cool Quote
“the government is charged with caring about all of us together, but none of use on our own”
Impossible for them to think about us individually
But it is the problems that affect us individually that makes GDP matter
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Big 3Inflation, unemployment, growthWith a partner answer the following:1. How do you calculate inflation?
Need equation for market basket, CPI, & inflation
2. Compare the 4 types of unemployment & define the natural rate
3. Draw two separate graphs depicting growth What needs to happen for economy to grow?
What specifically can you do to encourage that growth? Draw the loanable funds graph.
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These guys matter
Gov’t constantly trying to fight them allImpossible to do so simultaneouslyWhy?When will you see unemployment?When will you see inflation?
The two are typically opposites
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New Graph
Some Phillip guy figured it outPhillips Curve shows tradeoff between
the twoLRPC set at natural rate of unemploy
Can have a situation in which both increase
How?
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Supply Shocks
Sudden changes in AS curveCan go either wayDecrease in gas prices cause favorableNatural disasters cause negativeAS shifts to the left…what happens?Prices go up (inflation)Output goes down (causing reduced output,
which means people lose jobs)STAGFLATION
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We desire stability
No, actually we demand itGet very unhappy when not stableBlame gov’t
Can they really control it that much?
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Big, big, big budget
This year Obama’s budget is $3.6tUnparalleled amount of power/influenceBut can they really do whatever they want?NOPE for two reasons
1. only “control” so much spending 2. it involves Congress
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Bad music kills ears
Most of gov’t budget is actually MANDATORY SPENDING
Same concept as homeworkThings like safety netsCan only control DISCRETIONARYRelatively small portion of budget
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Vote them all out?
Congress has all time low approval rating (positive signs of late)
Couldn’t pass bill for emergency unemployment benefits
How can they agree enough to “fix” the economy?
Luckily we have AUTOMATIC STABILIZERS
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Auto pilot w/o sleeping
Some actions designed to kick in when needed w/o intervention necessary
When in recession, what fiscal policies need to happen?
Cut taxes & increase spendingThat happens w/o trying
How?
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Cruise Control at 105
When economy hurting it needs helpWe need helpPeople lose jobs or make less money
their taxes go downLikewise spending picks upMore people collect unemployment, food
stamps, etc.Taxes down & spending up w/o policySame works in reverse
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Still need more help
Role of gov’t to stabilize business cycleCan do so using FISCAL &
MONETARY POLICYFiscal--taxes & spendingMonetary--control of money supply
RR, DR, OMOCan use these guys to put economy
where we want it
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Need proof…look at picture
This is your ideal economySorry, wrong picture
QuickTime™ and a decompressor
are needed to see this picture.
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What does it look like?
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LRAS is our goal
X marks where we are atVertical line is our goalLRAS, potential GDP, natural rate of
unemployment, full employment
Any deviation needs fixed
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Have some choices
INFLATIONARY GAP Economy OVERHEATED
RECESSIONARY GAP Economy in a recession
ALL YOU NEED TO DO IS CLOSE THE GAP…HOW HARD IS THAT
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They are sure trying
But why are they failing?Who actually controls the economy?
Try as they might it is the CONSUMERS who control a larger portion of the economy
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Still know what to do
Just b/c they can’t fix it doesn’t mean we don’t know what needs fixed
AS/AD graph shows us what needs done
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Picture of fixing
X marks where we are…vertical marks where we want to be
Three options:1. Everything is good; E = V2. Recessionary Gap; V > E3. Inflationary Gap; E > VGoal is to get E = V
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Distance is easy
Distance btwn is what is neededDo you need to stimulate economy by
that entire amount?No,no,noRemember what happens when money
is spentSomeone else earns it, who then
spends it…etc.
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Same as MS multiplier
The same thing happens here as creation of money process
Money is earned, spent, earned, spent, earned, spent forever UNLESS IT IS SAVED
SAVING, NOT SPENDING, MONEY IS ONLY THING TO LIMIT THIS PROCESS
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APC, APS, MPC, MPS
Last big point of macroAPC = average propensity to consume
% of our income we spendAPS = average propensity to save
% of our income we save
As with micro, don’t focus on average but instead MARGINAL
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MPC
Marginal propensity to consumeWhen given another $, amount that we
spendMPS: same thing but amount that we
save
MPS + MPC = 1All money is saved or spent
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Works same as RR
1/RR is ms multiplierBanks saving money is the same thing
as us saving money (limits circulation process)
Expenditure multiplier then becomes
1/MPS or 1(1-MPC)
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Sample Recession
Say they want to stimulate the economy $200 billion
If the MPS is .2, how much should the gov’t increase spending to do so?
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Spending is Spending
Doesn’t matter whether it is by consumers, gov’t, for investment, etc.
Spending counts the sameChanges in taxes work a little bit
differentSo does the multiplier when considering
exports
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Tax Multiplier
When the gov’t raises taxes they take money we would have spent…but also take money we would have saved
TAX MULTIPLIER ALWAYS SMALLER THAN SPENDING MULTIPLIER
Some of the money would have been saved Likewise if the gov’t reduces taxes some of
the money will be saved
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End Result
Must reduce the value of the spending multiplier by amount of it actually spent
Spending multiplier = 1/MPSTax multiplier = (1/MPS) x MPC
Amount we spend of the change in taxesAlso written as MPC/MPSSometimes expressed as negative
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Open Economy Multiplier
When we save money it leaves our “spending cycle”
Likewise when we buy imports it does the same thing
OE multiplier then combines effect of both savings & buying imports
OE = 1 / (MPS + MPi)
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Practice
With a partner calculate each of the following multipliers: Spending: MPC = .9 Tax: MPS = .05 Spending: MPS = .3 Tax: MPC = .5 OE: MPC = .2; MPi = .05
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Part 2
Now fix the economyRecessionary gap of $500 billion…MPC
= .10…how much should gov’t increase spending?
How much would they need to cut taxes?
If MPi .1, how much would they need to increase spending?
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Another way to look at it
Keynesian CrossGDP as a picture
Autonomous spending = necessary regardless of income
Slope of Consumption Function = MPC
HOW CAN THE KC BE USED TO EVALUATE WHAT NEEDS TO HAPPEN TO THE ECONOMY?
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Bottom Line
Why does macro exist?What’s the gov’t’s job (since GP)?How can they do it?What influence do we have?
Saving, velocity of money, MPC
Connect the dots and you get the whole picture.