Upload
christad13
View
73
Download
0
Tags:
Embed Size (px)
Citation preview
ARE YOU READY TO LEARN??
Unit III Learner’s Guide
Aggregate Demand/SupplyInvestment
Consumption/SavingFiscal Policy
What is it?
• The relationship between price level(PL) and Real Gross Domestic Product(RGDP) is inverse
• Shows the amount of RGDP that the private, public, and foreign sector collectively desire to purchase at each possible PL
Reasons it is Downward Sloping?
• Real Balances Effect• Interest Rate Effect• Foreign purchases Effect
Model of AD
Shifts in AD
• Caused by changes in C(consumption), I(investment), G(government spending), Xn (net exports)
• in AD= shifts to the right
• in AD= shifts to the left
SHIFT TO THE RIGHT
SHIFT TO THE LEFT
What is it??
• The level of RGDP that firms will produce at each PL
• 2 types of AS:– Long Run (LRAS):period of time where input
prices are flexible and adjust to PL– Short Run (SRAS):period of time where input
prices are sticky and doesn’t adjust to PL
Long Run Aggregate Supply
• Marks level of full employment in economy• Analogous to PPC• Measures potential output• Causes of LRAS to shift:– Increase in capital– Technology– Eco growth– Entrepreneurship– Resource availability
LRAS Model
Short Run Aggregate Supply
• Shifts caused by change in input/resource prices
• in resource prices= SRAS shifts left• in resource prices= SRAS shifts right
• in SRAS= shifts to the right• in SRAS= shifts to the left
SRAS (cont’d.)
• Key to understanding shifts in SRAS is per unit production cost
• FORMULA: – per unit prod. cost= total input cost
total output• Productivity• FORMULA:
– Productivity= total output total input
• More prod.= lower unit prod. cost=SRAS • Less prod.= higher unit prod. cost= SRAS
SRAS Model
Full Employment
• Equilibrium exists where AD intersects SRAS and LRAS at the same point
Recessionary Gap
• Exists when equilibrium occurs below full employment output
Inflationary Gap
• Exists when equilibrium occurs beyond full employment output
Ranges/Shapes of AS
• Keynesian Range: – Has a horizontal AS curve when eco is below full employment
which cause AD to shift outward• RGDP , u% , PL is constant
– Demand creates its own supply• Intermediate Range:
– AS is in btwn Classical and Keynesian range– When occurs AS shifts outward
• GDP & PL
• Classical Range: – In Long Run, AS curve is vertical– Supply creates its own demand(Say’s Law)
Ranges/Shapes of AS Model
The Debate PT.1
The Debate PT.1(cont’d.)
The Debate PT.2
The Debate PT.2(cont’d.)
What is it??
• Money spent or expenditures on:– New plants(factories)– Capital equipment(machinery)– Technology(hardware/software)– New homes– Inventories(goods sold by prod)
Expected Rates of Return
• How does business make investment decisions?– Cost/benefit Analysis
• How does business count the cost?– Expected Rate of Return
• How does business determine the amount of investment they undertake?– Compare Expected Rate of Return to interest cost
• If E.R.R > interest cost, then invest• If E.R.R < interest cost, then don’t invest
Real v. Nominal
• Nominal: the observable rate of interest • Real: subtracts out inflation(π%) and is only
known – Example- post facto
• FORMULA (real int. rate (r%)):– r%= i% - π%
Investment Demand Curve(ID)
• Shape of curve is downward sloping• Why?
– When int. rates are high, fewer investments are profitable, when int. rates are low, more investments are profitable
– There are few investments that yield high rates of return, and many that yield low rates of return
• Shifts in ID Curve:• $ of prod• Business taxes• Tech change• Stock of capital• expectations
Consumption/Saving
What is Consumption?
• Household spending• Ability to consume is constrained by– Amt of disposable income (DI)– Propensity to save
• Do household consume if DI=0?– Autonomous consumption– Dissaving
• *Disposable Income : income after taxes or net income
What is Saving?
• Household NOT spending• Ability to save is constrained by – Amt of DI– Propensity to consume
• Do households save if DI=0?– NO!!
• *Disposable Income: income after taxes or net income
APS & APC
• APC= Average Propensity to Consume• APS= Average Propensity to Save• FORMULAS:– APC + APS= 1– 1 – APC= APS– 1 – APS= APC– APC > 1: dissaving– -APS: dissaving
MPC & MPS
• MPC= Marginal Propensity to Consume• MPS= Marginal Propensity to Save• % of every extra $ earned that is saved• FORMULAS:
– MPC= ∆ C ∆DI
– MPS= ∆ S ∆DI
– MPS + MPC= 1– 1 – MPC= MPS– 1- MPS= MPC
Determinants of C & S
• Wealth• Expectations• Household debt• Taxes
What is it?
• An initial ∆ in spending (C,I,G,Xn) causes a larger ∆ in aggregate spending or AD
• Why?– Expenditures and income flow continuously which
sets off a spending increase in the eco• FORMULA:– 1/ 1 – MPC OR 1/ MPS
• *multipliers are (+) where there is an increase in spending and (-) when there is a decrease.
Tax Multiplier
• When gov’t taxes, the multiplier works in reverse
• Why?– Because now money is leaving the circular flow
• FORMULAS:– -MPC/1 – MPC or –MPC/MPS
• *if there is a tax cut, then multiplier is (+) because there is now more $ in circular flow
What is it?
• Changes in the expenditures or tax revenues of the fed gov’t– 2 tools of fiscal policy:
• Taxes: gov’t can increase or decrease taxes• Spending: gov’t can increase or decrease spending
• Fiscal policy is enacted to promote our nation’s eco goals:– Full employment– Price stability– Eco growth
Deficits, Surpluses, and Debt
• Balanced budge– Revenues= expenditures
(profit) ($ spent)
• budget deficit– Revenues < expenditure
• Budget surplus– Revenues > expenditure
• Gov’t debt– Sum of all deficits – sum of all surpluses
• Gov’t must borrow $ when it runs a budget deficit• Gov’t borrows from:
• Individuals (savings bonds)• Corporations• Financial institution• Foreign gov’t/ entities
Fiscal Policies
• 2 options:– Discretionary Fiscal Policy (take action)• Expansionary Fiscal Policy (think deficit)• Contradictory Fiscal Policy (think surplus)
– Nondiscretionary Fiscal Policy (take NO action)
Discretionary v. Automatic Fiscal Policies
• Discretionary:– or gov’t spending and/or taxes in order to return the
eco to FE– Involves policy makers doing fiscal policy in response to
an eco problem• Automatic: – Unemployment compensation & marginal tax rates are
examples of automatic policies that help mitigate the effects of recession and inflation
– Takes place w/o policy makers having to respond to current eco problems
Contradictory v. Expansionary Fiscal Polices
• Contradictory:– Policy designed to decrease AD– Strategy for controlling inflation– Inflation is counted– gov’t spending – taxes
• Expansionary:– Policy designed to increase AD– Strategy for increasing GDP, combating recession– Reducing unemployment– Recession is counted– gov’t spending– taxes
Weaknesses of Fiscal Policy
• Progressive Tax System– Avg tax rate rises w/ GDP
• Proportional Tax System– Avg tax rate remains constant as GDP ∆
• Regressive Tax System– Avg tax rate falls w/ GDP
• *the more progressive the tax sys, the greater the econ’s built in stability
Thank you, Come again!!