Economics 110

2-5-07 Homework Negative income tax Permanent income hypothesis expenditure is based upon permanent income 1776 Wealth of Nations Friedman pushed for school vouchers Monetary policy the use of Federal Reserve tools to manipulate the economy Fiscal policy the use of government spending and taxation to manipulate the economy Deficit spend more than you take in Recession a downward trend in the business cycle where income, output, and employment are decreasing. Business Cycle a period non-recurrent fluctuation in the economy GDP the total market value of all final goods and services produced in an economy in a given year. GNP the total market value of all final goods and services produced by an economy in a given year. 2001 and 2003 Bush tax cuts Milton Friedman wanted a constant money supply rule he wanted it should grow 3.5% every year for stability no more guessing what the Fed will do 3.5% matches GDP growth you could no longer use discretionary monetary policy Asset something you own that has value Liability something for which you are responsibly to pay Assets minus liabilities = net worth Negative net worth = insolvent C&C = coins and currency Reserves at the Federal Reserve self explanatory Government Securities T-bill usually 3-12 month T-Note 1-10 years T-Bond above ten years National Debt is in the 8 trillion dollar range Demand Deposits Checking accounts Savings Deposits savings account Time Deposits for a certain length at least CDs (certificate of Deposit) Correct terms on reserve Legal (or actual) reserves C&C + reserves at the Fed Required reserve a percentage of the T,D, and S deposits Excess = legal reserves required reserves M1 most liquid form of money supply C&C (20% of the money supply) DD (70%) Travelers Checks (less than 1%)

2-2-07 Target is $20,000 50% negative income tax You just made $14,000 - $3,000 Flat tax a proportional tax the percentage tax stays the same as the base increases Progressive our current system JFK 1961 91% was the highest marginal tax rate Reagan 1980 highest was 70% down to 28% Homework CPI for Germany, Yugoslavia, Hungary CPI Milton Friedman Inflation is always and everywhere a monetary phenomenon. You cant have inflation without manipulating the money supply Three tools of the Fed in a Recession Open Market Operations buying and selling of Gov. Sec. (most used) Change the Reserve requirement (rarely used) Change the discount rate (fairly often) Discount rate the interest rate that the Fed charges Financial institutions The Fed is very independent Technically and legally the Fed is a private corporation How does the Fed make money? (It makes a bunch.) Homework what is the Chairman of the Feds salary? Economics the science of allocating scarce resources with alternate uses so as to minimize the wants of society. Opportunity cost the cost of what you forgo by choosing something else Sunk cost something you have paid and cant get back Marginal additional slope of the total function first derivative in calculus Diminishing terms to studying Germany July 1922 = 1 January 1924 (18 months later) = 750,000,000,000 Yugoslavia January 1993 = 1 January 1994 = 600,000,000,000,000 Hungary June 1945 = 1 June 1946 = 828,000,000,000,000,000,000,000,000 2-9-07 Positive economics descriptive (what is) Normative Economics the way it should be (value judgment)

Microeconomics one business, industry, market, person Macroeconomics deals with the whole economy GNP The value of all final goods and services produced by an economy. Utility satisfaction Factors of production things that are needed in order to produce Land (natural resources) Labor (personnel) Capital (plant and equipment) Entrepreneurship (risk taker) Economic returns to the factors of production Labor wages Land rent Capital interest Entrepreneur profit Unintended effects Homework make a demand curve for reckless driving Ceteris paribus all other things constant All other things being equal In economics y stands for income Will use infinity With a forty-five degree line both values are the same if the scaling is the same Homework read chapter 2 2-12-07 PPF all the possible combinations of two goods that can be produced with a certain set of resources A PPF with constant opportunity cost is a straight line A concave PPF shows increasing opportunity costs Under the PPF is a point with unemployed resources Indifference curve any point on an indifference curve give you the same amount of utility/satisfaction Utils measurement of satisfaction Law of diminishing marginal utility you get less utility for each marginal addition With each successive unit of a product you consume you will get less and less additional satisfaction. Rational Man we are making rational decisions Mercantilism to drain resources from a colony and bring it back to the mother country, gold Adam Smith Absolute advantage with a given set of resources I can outproduce you Zero Sum game a complete balance between trade partners Positive sum game both sides gain Comparative advantage produce where you have the greatest advantage or the least disadvantage. One country cannot have a comparative advantage in both goods IN general economists like free trade

People like trade when you have a level playing field The farmer in the US is being subsidized The Great Depression = BAD The reason why is that most countries were putting on tariffs and quotas Dumping international dumping is when you sell a product in another country at a lower price than what you sell it for in your home country used in order to put international competition out of business Homework: send your parents a valentine 2-14-07 Demand the amount of good people are willing and able to purchase at various possible prices within a given time. Law of Demand Price varies inversely with quantity demanded. A change in demand is a shift of the demand curve Determinants of Demand Changes in tastes and preferences Changes in disposable income Changes in the number of buyers Changes in the prices of related goods Expectation of Future price Market demand is the horizontal summation of individual demand curves Personal income tax decreased Normal Good a good that when personal income increases demand increases Inferior Good a good that when personal income increases you buy less Poison milk powdered milk mixed with regular milk When the price of the substitute increase the demand for the original product increases When the price of the compliment increases the demand for the original product decreases A change in quantity demanded is a movement along the original demand curve Supply the amount of goods and services suppliers are willing and able to produce and offer for sale at various possible prices Determinants of Supply Change in Technology Change in resource costs Change in the number of sellers Change in supply = a shift in the supply curve Change in quantity supplied = a movement along the supply curve Price floor a legal limit on how low you can sell a product for Price ceiling a legal limit on how high you can charge for a product Homework 1930s Wheat is selling for $2 a bushel Government sets a price floor at $3 a bushel make a graph of it Price Ceiling 1973 gasoline example market price is $.60 price ceiling was set at $.40 rationing to solve the shortage Homework Berkeley California the going rate for an off campus room was $300 the city counsel put a ceiling at $200 graph and tell problem

QUIZ
2-16-07 You want to know the percent increase in the market Homework Read A10 on Thursdays WSJ Ways to counteract a surplus Increase demand Decrease supply (increase corporate income tax) Pay a producer not to produce Give the surplus as foreign aid Ways to counteract a shortage: Get rid of the price ceiling Why does the demand curve slope downward? 1. Law of diminishing marginal utility (pp. 63) 2. Substitution effect as the price of a product goes up we will substitute out of that product and into something else 3. Income effect as prices increase your purchasing power decreases Why is it important to know what the demand curve looks like? TR Price times quantity sold When we make policies that influence the economy we ask economists whats going to happen to Consumer Surplus the area below the demand curve down to the market price Producer Surplus the area above the supply curve up to the market price Dead Weight loss Homework read chapter 4 2-19-07 8.25 is the prime rate as of 2-16-07 Prime interest rate is the rate they charge to their best customers 6.25 is the discount rate The Federal Funds rate moves all day long If at the end of the day a lot of banks are reserved deficient then the Federal Funds will go up FOMC Federal Open Market Committee The Discount rate will stay the same for at least six weeks

Pension plans agreed payments over time according to your standing with the company 401K a retirement plan through your employer Homework find out what you can about empirical evidence about Min. wage Dialysis is a cost 2-21-07 Antitrust suits that prevent monopolies Subscribers are increasing at an increasing rate Glass ceiling top on how high you can go in an industry Homework Labor force participation rate for women and for men; graph of the last 50 years Opportunity costs Leisure the opportunity cost for men to give it up is high; it is low for women Work Whenever the quantity being produced is not equal to the market clearing quantity you are likely to have a misallocation of resources. What happens to consumer and producer surplus and in the whole process do we end up with a dead weight loss. Dead weight loss an area that used to be a surplus but is no longer wither one

EXAM surplus graph pp. 105

Im not going to pay usually not true Time is the price you pay

EXAM Demand and supply and price for highways

Homework Read chapter 17 Elasticity deals with responsiveness Price elasticity of demand how does quantity demanded respond to a change in price Generally elasticity a change in the numerator = the numerator responds a little Elasticity = %change in Qd/% change in P Arch elasticity is the elasticity is what we use between points A one percent change in price leads to a (elasticity) change in quantity demanded. 2-23-07 Homework invested $100,000 in the Dow Jones in Jan. 1 1989 and likewise in Japan Arc elasticity is averaging the elasticity across the range Elastic = relatively elastic Wool is unitary elastic Assumption for perfectly elastic Homogeneous product Whenever you have something that is inelastic a price raise will increase total revenue. When you have elasticity a price raise will decrease total demand. Nikkei - 38,915.87 to 18108.79 = 20807.08 = 46% drop = $46,000 Dow - 2,256.43 to 12686.02 = 2,256.43 = 562% increase = $562,216.42

2-26-07 Diminishing Marginal utility with each additional unit of consumption less and less pleasure is gotten Risk aversion concave utility function Indifferent same level of utility for different goods Optimal consumption rule consumer equilibrium the equation of equality relating the utility per dollar of two goods 2-28-07 Sub-prime loan thats made to people with poor credit Alan Greenspan said that it was time Shanghai dropped 9% Hedging historically used as an insurance policy Hedge fund go in and buy and sell futures very risky tend to have more money Equity fund looks at whats going up and goes for a sure thing Banks keep reserves for bad loans outside the required reserves It is a sign that banks are doing well if they dont have much in reserves for bad loans FDIC has a lot of money because very few banks have failed When you put a tax on the item it shifts the supply up vertically by the amount of the tax Homework make a relatively elastic tax graph Homework Appendix to chapter 18

QUIZ
3-2-07 Cigarettes excise tax consumers pay most Indifference curve characteristics Indifference curves have the same value at any point on the curve They slope downwards Tend to be convex A shift to the right is an increase in utility Indifference curves should never intercept Indifference curves fill the plane (graph) every point on the graph has an indifference curve Homework chapter 19 3-5-07 Budget line

EXAM draw a demand curve derived from a graph with budget lines and indifference curves EXAM 12 Multiple choice, 12 definitions, then graphing Adam Smith is a classical economist Based mostly on a perfectly competitive market Shirking not doing what youre supposed to be doing Three types of Businesses Sole proprietorship o You make your own decisions o You get all the profits o Youre only taxed once o Easy to start Business plan is essential to get a loan for start up. Big drawback is unlimited liability Not perpetual Partnership o You have help with startup o Double the workforce Bad: you have to share the profits Unlimited liability Corporation o Limited liability o Lots of capital o Division of labor

Corporate income tax has to be paid at about 35% Then the corporation pays dividends and puts some back in (retain earnings) Discounted bond you only pay a portion of the total principle and the interest builds until you reach the total principle and then you can collect

EXAM

3-9-07 Option the right to buy a stock at a certain price within a certain time period Many execs get options as part of their pay Feds beige book economic report from all 12 Federal Reserve areas and what they think is going to happen Accounts receivable something owed to you 2/10/30 = 2% discount if you pay me within 10 days of receiving the bill and you owe it to me in 30 days Homework make a production function Homework first 10 pages in chapter 20 TP = total product MP = marginal product = change in output/change in input (usually labor) AP = average product Important relationship between total average and marginal output 3-12-06 Point of inflection the point where the increasing changes from increasing at an increasing rate to increasing at a decreasing rate Marginal will always go through the peak of average Marginal leads the average If marginal is above the average the average will be going up If marginal is below the average the average will be going down A ray drawn from the origin to any point on the total product curve; the slope of that ray will be average product

EXAM production function without numbers

Break even = normal profit Economic profit = excess profit = profit Total fixed costs a cost that does not vary over a production period Variable costs costs that varying as production numbers vary FC + VC = TC (fixed costs + variable costs = total costs) Homework read the rest of chapter 20 3-14-07 P=AR=MR=d In perfect competition the price remains the same 3-16-07 Manfreds rules Always produce where the slope of the Total revenue curve is equal to the slope of total cost curve where they are equal is the Q line Where the Q* line intersects TR is the firms total revenue

Where the Q line intersects TC is the firms total cost

The Slope of TR = MR The slope of TC = MC Always produce where MC = MR 3-26-07 Leading economic indicators Homework lookup the ten leading economic indicators A firm will shutdown when they are unable to cover all of their variable costs Fabs rules Always produce where MC = MR and we call that our Q line Where the Q line intercepts the AR will be the firms price Where the Q line intersects the ATC is the firms cost per unit Homework Q = 20 Profit = 40 Cost per unit = 8 make a total and average curve diagram with these numbers The 10 components of the Index include: 1. Average weekly hours worked by manufacturing workers 2. Average number of initial applications for unemployment insurance 3. Number of manufacturers' new orders for consumer goods and materials 4. Speed of delivery of new merchandise to vendors from suppliers 5. Amount of new orders for capital goods unrelated to defense 6. Amount of new building permits for residential buildings 7. The S&P 500 stock index 8. Inflation-adjusted monetary supply (M2) 9. Spread between long and short interest rates (the yield curve) 10. Consumer sentiment 3-28-07 IPO = Initial Public Offering Homework in the book Characteristics of a constant cost industry As time passes there is generally no reason for the cost structure to increase or decrease Generally the labor force will be semi skilled or unskilled Generally the input being used represents a small portion of the total inputs use Little technology changes Characteristics of a decreasing cost industry As time passes there are reasons why the cost structure will decrease There is a good chance that the industry has something to do with technology

External economies to scale

Characteristics of an increasing cost industry As time passes there are reasons for the cost structures to increase Quite often the labor force is a skilled one The input being used to produce the product represents a large portion of the total inputs use Sarbanes Oxley passed after the Enron scandal saying that the accountants cant be the same as the auditors 3-30-07 Futures contract today I will make a contract with you that you will pay me so much for something at a future date Capital goods plant and equipment Hedging historically a form of insurance Futures contracts are a form of insurance Tombstone an advertisement for stock bonds and other stuff Prospectus gives information on a company such as what it does, who is on the board, ceos, a balance sheet, an income statement Imperfect forms of competition has price seekers Monopolistic characteristics One seller Lots of buyers Unique product Entry and Exit next to impossible Demand curve for the monopolist is the same as the demand for the firm Local monopolies are utilities Homework look up the length of patents Homework make a shutdown monopoly 4-2-07 Homework read chapter 23 Oligopoly is an industry that is dominated by a few firms Few firms Hard entry and exit Type one oligopoly Limited number of buyers Homogeneous product Industrial Type two has

Heterogeneous product Lots of buyers Consumer products

Kink demand curve oligopoly If one firm raises their price no one else follows If one firm lowers their price everyone follows The break between the two marginal revenue curves of kinked demand curve oligopolies is greater the greater the discrepancy between the slope of the two revenue lines. Oligopolies that have a kink in it tend to have prices that are sticky. And tend to be so around the kink. They are sticky because of total revenue. Prices stick around the kink in the demand curve. Homework look and see what they tried to do in Canada they put a huge tax on cigarettes in an effort to keep people from starting Cartel oligopoly a group works as one

QUIZ
4-4-07 Diffusion index tells us what percent of the market are doing something (could be any aspect of the surveyed) Not only does it tell us the extent of whats happening it also has recent historical importance Mutual fund a collection of stocks Indexed mutual fund a fund that follows an index Homework read about price discrimination Price discrimination selling things at different prices to different people Buying a car They ask what you will pay in a monthly payment say no You want to know the invoice price of the vehicle They still make a profit at invoice hold back is a certain percentage they will make no matter what manufacturer incentives as well (per model or brand) 4-6-07 Price Discrimination First discrimination among buyers Second Degree discrimination by quantity airlines

Third Degree discrimination by group/time/types No load mutual fund no commission Loaded pay a commission Closed end fund not taking more money Homework finish graphs for monopolistic competition Perfect vs. Imperfect Price is lower with perfect Quantity is greater in perfect Efficiency producing output at the lowest possible cost MC = P economists like this because P is the value to consumers If we get the price = MC then the cost to produce it is exactly equal to our value of it. Perfect competition MC = P A long run average cost curve is developed from he tangent points on the short run average cost curves. Moving the cost structure down in economies of scale More efficient machines Division of labor Learning by doing, you create more efficient ways to do things Supplies in bulk Diseconomies of scale Bureaucratic cost lost

EXAM
4-9-07 Unemployment is at 4.4% - very very good Natural Rate of unemployment natural number of transfers 4.5-6% Homework pp. 587-588 and Ch. 6 Marginal Revenue profit MRP = the additional profit in regards to a cost Unemployed in order to be so Be looking for a job Be capable of work o Children (Under 16) o Disabled o Incarcerated Must be willing to work Must be without work Bureau of Labor stats sends out surveys to 60,000 families every month

Definition of the labor force Total population - those not capable = potential labor farce - unwilling or not looking for work = active labor force - military personnel = Civilian Labor Force = CLF - those employed = unemployed Unemployment rate is Unemployed/CLF * 100 = unemployment rate 137.3 Million in 1998 unemployment was 6.23 million 2006 4.3% overall unemployment Higher or lower unemployment groups o 16-19 year olds higher (lack of education) o Men higher o Women lower o White lower o Black higher o Asian lower o Hispanic higher Women make less than men for some jobs historically why o Glass ceiling o Risk of maternity leave o Higher labor jobs o Location men moved and women followed 4 different types of unemployment Business cycle recurrent non-periodic fluctuation in business and economic activity Recession (Classic) two consecutive quarters in which GDP was negative Recession (Neo) a downward trend in the business cycle in which employment, output, and spending is going down GDP is made up of three different types of spending o C = Consumer spending largest component of GDP o I = investment spending o G = government spending o Nx = foreign spending exports imports

General or cyclical unemployment unemployment caused by too little total spending in the economy. How do we solve General Unemployment Increase spending Reduce taxes on personal and corporate Lower interest rates raises I spending Increase Government spending 1930s really high - 25% In the same time frame parttime employment increased bigtime Underemployment skyrocketed Safety Nets we have these today and they would make a large unemployment number harder to bear because it would topple over the government via spending 1940-1945 very very low unemployment 1-1.5% Several Million came into the labor force who never expected to go into the labor force Recession times since 1945 48-49 53-54 57-58 60-61 69-70 73-75 80 81-82 worst since the great Depression 90-91 01 4-13-07 Options market An option gives you the right to purchase a stock at a specific price at a specific time Options tend to be very risky Striking price the price for which you can by it Structural unemployment: unemployment that is caused by a mismatching of jobs and workers skills Can be due to a decrease in the demand for a specific type of labor o A change in technology o A declining demand for a particular product can cause structural unemployment An increase in the supply of a specific type of labor Solving structural unemployment o Retraining programs o Incentives for the unemployed industries

o Government sponsored relocation Seasonal unemployment: unemployment that reoccurs regularly during the same season of the year o Nature can cause seasonal unemployment o Social customs Solving seasonal unemployment o Compliment seasonal employment Frictional Unemployment: When we are unable to synchronize job endings and job beginnings (generally shorter) Solving frictional unemployment o Dont quit a job until you have another one o Intermediate institutions 4-18-07 Tremendous pent up demand for consumer good caused rampant inflation during 19461947 Early 50s psychological inflation people were remembering shortages and rationing people bought a lot more than they needed (hoarding) in fear of a WWIII rising demand curves caused higher prices caused inflation there really wasnt any need for saving therefore it was psychological 61-62 Kennedy was the pres and US Steel wanted to raise prices if the price of steel rose then the prices of everything else would rise as well Kennedy requested them to keep the prices down (jawboning) mid 60s Johnson was the pres and he couldnt keep them from raising prices Late 60s high inflation from the Vietnam War 71 Nixon was pres he put in a wage and price freeze to solve the problem of inflation his Republican base was enraged with price restrictions increasing benefits and changing model and changing job titles got around the freezes 74-75 inflation hit double digits oil (opec was formed) backed up inflation from the freezes hit now Homework lookup the CPI from 1975 until present and the inflation rate since 1984 and the prime interest rate from 1975 till present Late 70s-present 79-80 was around 12-13% Burns Accommodated the demand for money

Volcker keeps supply within the target 1981 prime interest rate went up to 20.5% GDP = C + I + G + Nx Volcker helped to cause the greatest recession since the Great Depression, but when you have a problem you have to pay a price to fix it. Types of inflation Demand pull inflation Inflation caused by too much total spending in the economy. o It generally takes place at or near full employment o Usually blamed on consumers Solving Demand pull inflation o Let interest rates increase o Increase taxes o Decrease G spending Phillips curve the trade off of inflation and unemployment Cost push inflation Caused by power groups within society o Labor unions Escalator clauses an automatic increase in wages Escalator clause 1 where wages are attached and adjusted to the inflation rate you dont know what youre going to get but you will beat inflation Escalator clause 2 has a specified amount of wages set increases in wages you dont know that you will beat inflation o Monopoly powers OPEC Solving cost push inflation Prevent use of escalator clauses o In 1979, Carter said that anyone who had a government contract you have to limit your wage increases to 6% Wage and price freeze o Nixon tried this one o Stronger antitrust laws Homework get the data points for the unemployment rate and the inflation rate from 1960 to the present graph them from 60-83 make two copies leave the dots unconnected of one and connect them on another Keynesian Phillips curve shows the tradeoff between inflation and unemployment 2/3 of the cost of doing business is labor

EXAM wage and price spiral

ECONOMIC GROWTH We measure economic growth with GDP Nominal GDP GDP not adjusted for inflation Real GDP GDP that is adjusted for inflation Every year nominal GDP goes up Real GDP does not go up every year Real GDP per capita is a very accurate estimate of an economys growth Adjusts for inflation And population Homework look at Nicaragua 79% live on less than $2 a day 40% on less than $1 a day find their per capita GDP - $908 What things help a country grow Natural resources o Oil o Bauxite o Lumber o Coal o Natural Gas o Water o Fertile Soil o Sun Real capital goods o Plant and equipment o Infrastructure Human capital o Skilled workforce o Healthy workforce o Tech Savvy workforce New technology o New production means o New products o New ideas Joseph Schumpeter said that you need to break tech into invention and innovation Sociopolitical environment you have to have a stable country Theory Z of management family style of management

4-22-07 Employment act of 1946 said that one of the chief economic goals for our economy is to have the government concentrate on keeping unemployment low Stagflation a stagnating economy along with inflation Theory X of management autocratic management flows from the top down very command oriented Theory Y workers input is more important more group decision making more teamwork Theory Z Japanese the company is your family you stay there your whole life Two sector circular flow diagram Keynesian Economics Arguably the most influential economist of the 20th century LEFT!!! Government control particularly in fiscal policy Three most famous books in economics Wealth of Nations (1776) Das Kapital (Marx, 1850) The General Theory (Keynes, 1936) Multiplier effect if you make a small change in injection or a leakage and it results in a larger change in total Homework a=60, b=2/3 graph it change I by 15 show new set of numbers with a C+I curve change G by 20 graph C+I+G and show final equilibrium

QUIZ
4-25-07 FINAL CHAPTERS 5-7, 10-12 When stock markets are going in the opposite direction of ours it helps to diversify risk by investing in other stock markets Injection if they go up the economy expands Investment spending Government spending Exports Leakages if they go down the economy contracts

Taxes Imports Savings

Homework understand the multiplier process a = 50 b= 4/5 make a consumption and a savings function change I by 10 and note the increase in income 4-27-07 In equilibrium ejections = leakages 0 injections and 0 leakages at intersection of I and Sf MPC = 2/3 The initial spending with taxes is different than the initial spending with G or I Budget balance multiplier Up to the Great Depression we had classical and neo-classical economists Keynes In the long run were all dead. 4-30-07 Government expenditures Transfer payments a payment made by the government to consumers for which consumers do nothing in return, at that time. Military Interest on the national debt Three largest sources of income Personal income tax Social security taxes Corporate Income tax Excise tax a tax on a particular item Homework find tax brackets, tax on a quart of Alcohol in Kentucky Our tax system is a progressive graduated marginal tax rate Marginal tax rate pay per bracket/amount 0 30,000 = 15% 30 70,000 = 20% 70 150,000 = 30% EXAM The family makes $80,000 Tax evasion illegal means of not paying taxes Tax avoidance a legal means of not paying taxes generally for people who have higher incomes

Municipal bond local bonds tax free

FICA 7.65% 6.2% goes to SSI $93,000 is the max What has the Federal Gov done to make the sales tax less regressive
Tax Year:

Filing Status: If your taxable income is between...

your tax bracket is:

and and and and and and

% % % % % %

5-2-07 Indexing when you adjust something for inflation SSI is indexed Tax brackets are indexed Indexing did not take place until the mid 80s Bracket creep moving up tax brackets when inflation is not met with indexing In China they just increased the observe requirements for banks and tightening the money supply Pension fund a retirement plan FISCAL POLICY the use of government spending and taxation to manipulate the economy 2001 tax cuts fiscal policy Increase the money supply monetary supply Old rules of public finance (Adam Smith) The purpose of government spending to provide goods and services which strictly private arrangements would not provide enough of o Military o Infrastructure o Education

o Legal system The purpose of taxation is to provide money for number one. The government budget rule never spend more than you take in

New Rules of Public Finance in the 1930s (Paul Samuelson) Ditto ditto ditto plus to help solve the problem of inflation and unemployment Purpose of taxation ditto ditto plus to help solve the problem of inflation and unemployment The government budget rule o If we find the economy in a recession the budget should move in the direction of deficit o If we find the economy in an inflationary period the budget should move in the direction of surplus EXAM: Counter-cyclical discretionary fiscal policy attempts to break the cyclical downturns Counter-cyclical discretionary monetary policy same thing with different tools Externality events beyond control that affects the values of other things in its area MONEY: How do you know if a society has money universal medium of exchange M1 the most liquid form of money Coins and currency Checking accounts Travelers Checks FEDERAL RESERVE Created in 1913 Started working in 1914 Its our central bank 12 districts Technically and legally a private corporation Commercial banks own the Federal Reserve called member banks Very independent mainly because it does not need money from Congress A nonprofit organization that makes $10s of Billions a year It is there to help the federal government 5-7-07 Multiple expansion of the money supply Assumptions Reserve requirement is 20% When you take out a loan you take it all in your checking account

The bank loans out all excess reserves To get the process started a little boy finds a $1000 in his grandparents basement

We dont get the maximum because: All banks dont always loan out all their excess reserves People dont always take out loans in DD EXAM: Balance sheet, correct terms, punch it into the max increases in money supply The Federal Reserve Monetary Policy weapons Open market operations Reserve requirement Discount rate Use of these tools during a recession Buy gov. sec. Lower the requirement Lower the interest rate Use of these tools during inflation Sell gov. sec. Raise the requirement Raise the interest rate 5-9-07 Misery index unemployment + inflation Today 7.5% 1976 election: Carter and Ford (incumbent): 7.7% + 5.75% = 13.5% 1980 election: Reagan and Carter (incumbent): 7.1% + 13.5% = 20.6% 1984 election: Mondale and Reagan (incumbent): 7.5% + 4.3% = 11.8% 1988 election: Ducaucus and Bush (incumbent): under 10% 1992 election: Clinton and Bush (incumbent): 10.6% 1996 election: Dole and Clinton (incumbent): 6.3% 2000 election: Gore (incumbent) and Bush: 7.7% 2004 election: Bush (incumbent) and Kerry: 8.1% Chapter 7