Video #1
There are 3 types of money ; Commodity money, Representative money, and Fiat money ( the type we use today). There are also 3 functions of money; Median of Exchange, Store of Value, Unit of Account. Most people think Price = Worth (quality), but that isn't always so.
Video #2
In the Monay Market Graph supply of money is vertical because it doesn't vary based on interest rate. The supply of money is set by the fed in order to try and stabilize the interest rate. The money supply = quantity or interest rate.
Video #3
The FEDs have 3 tools for manipulating the money supply during a recession (expansionary) or in inflation (contraction ary). These methods include adjusting the reserve requirement, discount rate, and buying or sell government bonds and securities. In conducting expansionary policies you want to increase the amount of money in circulation. You would buy bonds, lower reserve requirement and discount rate. In conducting contractionary policies you want to sell bonds and increase reserve requirement and discount rate.
Video #4
Lonable funds is money that is available in the market for people to borrow. The rate at which this money is demand is dependent on interest rate. The higher the interest rate, the less the money is demanded and vice ver sa.All these variables are represented on a lonable funds graph.
Video #5
Money creation process creates $ by making LOANS. Reserve Requirement (RR) = % of bank total deposits that they have to keep in the reserved. The monetary multiplier = 1/RR.When people deposit money the money is loaned out to someone else but not all of it.
Video #6
The government loans money from people, and technically they're in more debit with America people. As the interest rate increases the price level increases. There's a direct correlation between the two.
Sunday, March 27, 2016
Friday, March 4, 2016
Unit 3 Consumption and Saving
- Disposable Income (DI): Income after taxes, or net income
- DI= Gross Income - Taxes
- 2 choices: Consume or Save their DI (never at the same time)
- Consumption: Household spending
- the ability to consume is constrained by:
- amount of DI
- the propensity to save
- Do households consume if DI=0?
- autonomous consumption
- dissaving
- Saving: Household NOT spending
- the ability to save is constrained by:
- amount of DI
- the propensity to consume
- Do households save if DI=0? NO
- APC(Avg Propensity to Consume) & APS(Avg Propensity to Save)
- APC + APS = 1
- 1 - APC = APS
- 1 - APS = APC
- APC > 1: Dissaving
- -APS: Dissaving
- MPC(Marginal Propensity to Consume): fraction of any change in DI that's consumed
- MPC= ΔC
-------
ΔDI - MPS(Marginal Propensity to Save): fraction of any change in DI that's saved
- MPS= ΔS-------
ΔDI - MPC + MPS = 1
- MPC = 1 - MPS
- MPS = 1-MPC
The Spending Multiplier Effect
- an initial change in spending (C,Ig,G,Xn) causes a larger change in aggregate spending, or aggregate demand (AD)
EQUATION: Change in AD
-----------------------
Change in spending
Multiplier= Δ AD
---------------
Δ C, Ig, G, or Xn
-----------------------
Change in spending
Multiplier= Δ AD
---------------
Δ C, Ig, G, or Xn
Tax Multiplier
- when the government taxes, the multiplier works in reverse b/c money is now leaving the circular flow
- Tax Multiplier (negative)
- -MPC -MPC
------------ OR ----------
1- MPC MPS - If there's a tax-cut, the multiplier is (+), b/c there's now more money in the circular flow
Unit 3 Classical vs. Keynesian
Basic Theory of Classical and Keynesian
Classical economic theory is rooted in the concept of a laissez-faire economic market. A laissez-faire--also known as free--market requires little to no government intervention. It also allows individuals to act according to their own self interest regarding economic decisions. This ensures economic resources are allocated according to the desires of individuals and businesses in the marketplace. Classical economics uses the value theory to determine prices in the economic market. An item’s value is determined based on production output, technology and wages paid to produce the item.
Keynesian economic theory relies on spending and aggregate demand to define the economic marketplace. Keynesian economists believe the aggregate demand is often influenced by public and private decisions. Public decisions represent government agencies and municipalities. Private decisions include individuals and businesses in the economic marketplace.
Unit 3 inflationary and recessionary gap
Inflationary and
Recessionary Gap
INflationary Gap
Output is high and unemployment is less than NRU
*Stagflation Stagnate Economy + Inflation*
Recessionary Gap Output low and unemployment is more than NRU
INflationary Gap
Output is high and unemployment is less than NRU
*Stagflation Stagnate Economy + Inflation*
Recessionary Gap Output low and unemployment is more than NRU
Thursday, March 3, 2016
Unit 3 AS
Aggregate Supply
What is Aggregate Supply?
Aggregate Supply is the amount of goods and services (real GDP) that firms will produce in an economy at different price levels. The supply for everything by all firms.
Aggregate Supply differentiates between short run and long-run and has two different curves.
Short-run Aggregate Supply •Wages and Resource Prices will not increase as price levels increase.
Long-run Aggregate Supply •Wages and Resource Prices will increase as price levels increase. 16 Short-Run Aggregate Supply In the Short Run, wages and resource prices will NOT increase as price levels increase.
Shifters Aggregate Supply
I. R. A. P.
1. Change in Inflationary Expectations If an increase in AD leads people to expect higher prices in the future. This increases labor and resource costs and decreases AS. (If people expect lower prices…)
2. Change in Resource Prices Prices of Domestic and Imported Resources (Increase in price of Canadian lumber…) (Decrease in price of Chinese steel…) Supply Shocks (Negative Supply shock…) (Positive Supply shock…) 2
3 Shifters of Aggregate Supply 3. Change in Actions of the Government (NOT Government Spending) Taxes on Producers (Lower corporate taxes…) Subsides for Domestic Producers (Lower subsidies for domestic farmers…) Government Regulations (EPA inspections required to operate a farm…)
4. Change in Productivity Technology (Computer virus that destroy half the computers…)
What is Aggregate Supply?
Aggregate Supply is the amount of goods and services (real GDP) that firms will produce in an economy at different price levels. The supply for everything by all firms.
Aggregate Supply differentiates between short run and long-run and has two different curves.
Short-run Aggregate Supply •Wages and Resource Prices will not increase as price levels increase.
Long-run Aggregate Supply •Wages and Resource Prices will increase as price levels increase. 16 Short-Run Aggregate Supply In the Short Run, wages and resource prices will NOT increase as price levels increase.
Shifters Aggregate Supply
I. R. A. P.
1. Change in Inflationary Expectations If an increase in AD leads people to expect higher prices in the future. This increases labor and resource costs and decreases AS. (If people expect lower prices…)
2. Change in Resource Prices Prices of Domestic and Imported Resources (Increase in price of Canadian lumber…) (Decrease in price of Chinese steel…) Supply Shocks (Negative Supply shock…) (Positive Supply shock…) 2
3 Shifters of Aggregate Supply 3. Change in Actions of the Government (NOT Government Spending) Taxes on Producers (Lower corporate taxes…) Subsides for Domestic Producers (Lower subsidies for domestic farmers…) Government Regulations (EPA inspections required to operate a farm…)
4. Change in Productivity Technology (Computer virus that destroy half the computers…)
Wednesday, March 2, 2016
Unit 3 AD
Unit 3:
Aggregate Demand
What is Aggregate Demand?
Aggregate means “added all together.”
When we use aggregates we combine all prices and all quantities.
Aggregate Demand is all the goods and services (real GDP) that buyers are willing and able to purchase at different price levels.
The Demand for everything by everyone in the US.
There is an inverse relationship between price level and Real GDP. If the price level
: •Increases (Inflation), then real GDP demanded falls.
•Decreases (deflation), the real GDP demanded increases
Aggregate Demand Curve
AD is the demand by consumers, businesses, government, and foreign countries
Changes in price level cause a move along the curve
Why is AD downward sloping?
1. Real-Balance Effect- • Higher price levels reduce the purchasing power of money • This decreases the quantity of expenditures • Lower price levels increase purchasing power and increase expenditures
Example: • If the balance in your bank was $50,000, but inflation erodes your purchasing power, you will likely reduce your spending. • So…Price Level goes up, GDP demanded goes down.
2. Interest-Rate Effect • When the 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? • Example: An increase in prices leads to an increase in the interest rate from 5% to 25%. You are less likely to take out loans to improve your business. • Result…Price Level goes up, GDP demanded goes down (and Vice Versa).
3. Foreign Trade Effect • When U.S. price level rises, foreign buyers purchase fewer U.S. goods and Americans buy more foreign goods
• Exports fall and imports rise causing real GDP demanded to fall. (XN Decreases)
• Example: If prices triple in the US, Canada will no longer buy US goods causing quantity demanded of US products to fall.
• Again, Price Level goes up, GDP demanded goes down (and Vice Versa).
Shifters of Aggregate Demand GDP = C + I + G + Xn
Shifters of Aggregate Demand
1. Change in Consumer Spending Consumer Wealth (Boom in the stock market…) Consumer Expectations (People fear a recession…) Household Indebtedness (More consumer debt…) Taxes (Decrease in income taxes…)
2. Change in Investment Spending Real Interest Rates (Price of borrowing $) (If interest rates increase…) (If interest rates decrease…) Future Business Expectations (High expectations…) Productivity and Technology (New robots…) Business Taxes (Higher corporate taxes means…)
3. Change in Government Spending (War…) (Nationalized Heath Care…) (Decrease in defense spending…)
4. Change in Net Exports (X-M) Exchange Rates (If the us dollar depreciates relative to the euro…) National Income Compared to Abroad (If a major importer has a recession…) (If the US has a recession…)
What is Aggregate Demand?
Aggregate means “added all together.”
When we use aggregates we combine all prices and all quantities.
Aggregate Demand is all the goods and services (real GDP) that buyers are willing and able to purchase at different price levels.
The Demand for everything by everyone in the US.
There is an inverse relationship between price level and Real GDP. If the price level
: •Increases (Inflation), then real GDP demanded falls.
•Decreases (deflation), the real GDP demanded increases
Aggregate Demand Curve
AD is the demand by consumers, businesses, government, and foreign countries
Changes in price level cause a move along the curve
Why is AD downward sloping?
1. Real-Balance Effect- • Higher price levels reduce the purchasing power of money • This decreases the quantity of expenditures • Lower price levels increase purchasing power and increase expenditures
Example: • If the balance in your bank was $50,000, but inflation erodes your purchasing power, you will likely reduce your spending. • So…Price Level goes up, GDP demanded goes down.
2. Interest-Rate Effect • When the 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? • Example: An increase in prices leads to an increase in the interest rate from 5% to 25%. You are less likely to take out loans to improve your business. • Result…Price Level goes up, GDP demanded goes down (and Vice Versa).
3. Foreign Trade Effect • When U.S. price level rises, foreign buyers purchase fewer U.S. goods and Americans buy more foreign goods
• Exports fall and imports rise causing real GDP demanded to fall. (XN Decreases)
• Example: If prices triple in the US, Canada will no longer buy US goods causing quantity demanded of US products to fall.
• Again, Price Level goes up, GDP demanded goes down (and Vice Versa).
Shifters of Aggregate Demand GDP = C + I + G + Xn
Shifters of Aggregate Demand
1. Change in Consumer Spending Consumer Wealth (Boom in the stock market…) Consumer Expectations (People fear a recession…) Household Indebtedness (More consumer debt…) Taxes (Decrease in income taxes…)
2. Change in Investment Spending Real Interest Rates (Price of borrowing $) (If interest rates increase…) (If interest rates decrease…) Future Business Expectations (High expectations…) Productivity and Technology (New robots…) Business Taxes (Higher corporate taxes means…)
3. Change in Government Spending (War…) (Nationalized Heath Care…) (Decrease in defense spending…)
4. Change in Net Exports (X-M) Exchange Rates (If the us dollar depreciates relative to the euro…) National Income Compared to Abroad (If a major importer has a recession…) (If the US has a recession…)
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