AP Macroeconomics Unit 4 blog videos

Part 1
- The 3 main types of money are Commodity money, which means good for good (cow for flour), the second type is Representative money, which uses gold or silver (gold standard), the last type of money which is the most current type is Fiat money which is money that is accepted by everyone and backed by the government. Money is known as a medium of exchange in which case every one accepts it across the country. Money is also a store of value, which means the money you put in will be the same amount as when you take it out. Money is a unit of account, that implies the price is worth the quantity in which you buy it at.

Part 3- Money market graphs are labeled by the interest rate being the Y-axis and Commodity being the X-axis. The graph will slope upward is the price is low and the demand is high and will slope downward when its the exact opposite. The graph is vertical because its not varying and is fixed by the Fed. The MMG will shift left or right depending on the demand for money unless changed by the Fed, the only way to change the supply of money is for the government increase or decrease during inflation or recession.

Part 4
- The two options to use during money policy is expansionary money (easy $) and Contractionary money (tight $). The first part is Reserve requirement In which they lower money supply during expansionary and raise with contractionary. With Discount rate the Fed will lower during expansionary and raise with contractionary. With expansionary the Fed will buy bonds and with contractionary the Fed will sell bonds.

Part 7
- With the Loanable Funds graph Price is on the Y-axis and Quantity of funds is on the X-axis. Demand for loanable funds is downward sloping, and Supply for loanable funds is sloping upwards. Supply for loanable funds is dependent on savings and it will increase when people have an incentive to spend money and decrease when people wants to save. If the government is running a deficit, that means the government is demanding money and the demand for loanable funds will increase.

Part 8
- Money creation process consists of two parts first one being money multiplier and second is multiple deposit expansion. During the money creation process governments create money by making loans.This increase is from the Multiple deposit expansion which affects the entire banking system but it is only a potential increase.For example the Reserve Requirement is 20% and the loan amount is $500, the total created is $2500 using (1/RR X loans)

Part 9
- When comparing MMG, LFG, and AD-AS curve graph they all correlate one what or another typically if one shifts to the right all of them shifts to the right. Lets say that in the MMG the government they increase the demand in money (which shifts to the right), when looking at LFG which also increase the quantity in loanable funds (shits the the right) and in the AD-AS graph the AD increases (also shifting to the right). The change in the supply of money is equal to the change in the price of money. Fisher effect says that if price increases then the other supply of money increases or vice versa.

FISCAL POLICY

-changes in the expenditures or tax revenues if the federal government

-2 tools of fiscal policy

.taxes- government  Can increase or decrease taxes

.spending- government can increase or decrease taxes

Deficits, Surplus, and Debt

Balanced budget
- Revenues = Expenditures

Budget deficit
- Revenues < Expenditures

Budget surplus
- Revenues > Expenditures

Government debt- 

-sum of all deficits - sum of all surpluses 

Government must borrow money when it runs a budget deficit

Government borrows from:

-individuals 

-corporations

-financial institutions 

-foreign entities or foreign governments

Discretionary fiscal policy (action)

-expansionary fp- think deficit

-contractionary fp- think surplus

Non-discretionary fiscal policy (no action)

Discretionary 

-increasing or decreasing government spending and/or taxes in order to return the economy to full employment directional policy involves policy makes doing fiscal policy to response to on economic problem

Automatic

-unemployment compensation & marginal tax rates are examples of automatic policies that help mitigate the effects of recession and inflation automatic fiscal policy takes place without policy makers having to respond to current economic problem

Expansionary fiscal policy

-combat recession

-^ govt spending ¥ lower taxes

Contractionary fiscal policy

-Combat inflation

-¥ govt spending ^ taxes

Automatic or built in stabilizers

.anything that increases the governments budget deficit during a recession and increases its budget surplus during inflation _without requiring explicit action by policy makers_

Ex. Transfer payments 

(ss, medicaid/care, unemployment, veterans benefits.)

progressive tax system- average tax rate (tax revenue/GDP) 

Proportional tax system- average tax rate constant as GDP changes

Regressive tax system- average tax rate falls with GDP

CONSUMPTION AND SAVINGS MULTIPLIERS

Disposable Income
-The income after taxes [Gross - Taxes]
-Consume or save (Spend or not spend)
-Consumption - Restricted by DI & propensity to save
-If DI = 0, autonomous consumption and dissaving

Saving - Restricted by DI & propensity to consume
If DI = 0, no saving


APC/APS = Average propensity to consume/save
-APC + APC = 1
1 - APC = APS
1 - APS = APC
-APS or when APC > 1 -> Dissaving

Multipliers
MPC + MPS = 1
MPC = 1- MPS
MPS = 1 - MPC

MPC
-Marginal ... Fraction of any change in DI consumed
(Change in Consumption/Change in DI)

MPS
-Fraction of DI saved
(Change in Saving/Change in DI)

Spending Multiplier Effect
-Initial change in spending; causes larger change in AS or AD
(1/(1-MPC)) or 1/MPS
-Multiplier = (Change in AD/Change in C, Ig, G, or Xn)
-Positive is increase; Negative is decrease

Tax Multiplier
-Reverse multiplier because it leaves circular flow
-Tax cut is positive because money enters circular flow
-Always negative
-(MPC/(1-MPC)) or -(MPC/MPS)
-Multiplier = (Change in AD/Change in C, Ig, G, or Xn)

CLASSICAL

Followers
-Adam Smith
-J.B. Say
-David Ricard
-Alfred Marshall

Say's Law

-Supply creates own demand
-Production = Income = Spending
-Underspending unlikely
-Whatever output produced will be demanded

Savings and investment
-Savings = Investment income
-Savings (Leakage) = Investment (Injection)

Loan able Funds Market

Wage/Price Flexibility
-Downward

Supply Curve
-Vertical

Output and Employment
-Determined by AS

Unemployment
-Rarely exists because of wage/price flexibility
-Cause: external (war)

Aggregate Demand
-Determines PL
-Stable if money supply is stable

Basic equation

-MV = PQ
-1965 - 1972

Role of government
-Monetary policy maintains steady money supply
-Laissez-faire is best
-Self regulating economy

Inflation
-Too much money

How long the short run is
-Short time

Emphasis today
-Microeconomics

Other
-Competition is good
-Invisible Hand
-Long run - Balance @ FE
-Trickle-Down effect - Help rich 1st, everyone else 2nd

KEYNESIAN

Followers
-J.B. Keynes

Say's Law
Depressions refute Say's Law
--Demand creates own supply
-Under spending persists

Savings and investments

-Savings not equal to investment
-Different motivations

Savings
-Future needs
-Precaution
-Habit
-Income level
-Interest rate

Investment
-Interest rate
-Rate of profit
-Expectations

Loan able Funds Market
-Investment from savings, cash, checking accounts
-Lending creates money -> Supply of money increases
-Inflation and unemployment are unstable

Wage/price inflexibility
-Prices and wages inflexible downward
-Ratchet effect

Supply curve

-Horizontal

Output and Employment
-Determined by AD

Unemployment
-Usually exists
-Causes:
-External (war)
-Internal (Savings not equal to investment

Aggregate Demand-Changes due to determinants
-Unstable even if money supply is stable due to fluctuations in investment spending

Basic equation
-C + Ig + G + Xn
-1973 - Present

Role of Government
-Fiscal Policy - Tax and spend
-Active government
-Economy is not self regulating

Inflation
Too much demand

How long the short run is

Long time

Emphasis Today
Macroeconomics

Other-
Flawed competition
AD is key; not AS
Leaks + Savings = Recession
Ratchet effects and Sticky Wages block Say's Law
We are doomed in the long run

INTEREST RATE AND INVESTMENT DEMAND

Investment

Money spend or expenditures on:

-New plants (factories)

-Capital equipment (machinery)

-Technology ( hardware and software)

-New homes

-Inventories (goods sold by producers)

Investment decisions

-cost / benefit analysis 

Determination of benefits

-expected rate of return

Count the cost

-interest costs

Amount of investment they undertake

-compare expected rate of return to interest cost

--if expected return > interest cost, then invest

--if expected return < interest cost, then do not invest

Real v Nominal

Difference is the observable rate kf interest. Rate subtracts out inflation (€%)

R% = i% - €% 

R = real interest rate

i = nominal interest rate

Pie= inflation rate

What determines the cost of an investment decision

-the real interest rate (r%)

Investment demand curve

Shape of investment demand curve

-downward sloping

Why?

-when interest rate are high, fewer investment are profitable; when interest rates are low, more investment are profitable

Shifts in investment demand (ID)

-cost of production

.higher cost shift ID <

.Lower cost shift ID >

-business taxes

.Higher taxes shift ID <

.lower taxes shift ID >

-technological change

.new tech shift ID >

.lack of tech shift ID <

-Stock of capital 

.If low capital then ID >

.If high on capital then ID <

-Expectations

.If positive then ID  >

.If Negative then ID <

WAGES

Nominal wages - amount of money received by a worker per unit of time

Real wages - amount of goods and services a worker can purchase with their nominal wage

Sticky wages - it is the nominal wage level that is set according to an initial price level and it does not vary due to labor contracts or other restrictions 

Implications recessions - output depends on changes in employment level 

Implication intermediate - output depends on changes in price and employment level

Implication inflation- output is independent of changes in the price level 

AGGREGATE SUPPLY

-the level of real GDP (gdp r) that firms will produce at each price level (PL)

Long run v Short run

Long run

-period of time where input prices are completely flexible and adjust to changes in the price level

-in the long run the level of real GDP supplied is independent of price-level

Short run

-period of time where input prices are stucky and do not adjust to changes jn the price level

-in the short run the level of real GDP supplied is directly realted to the price-level

Long run aggregate supply (LRAS) 

-The LRAS marks the level full employment in the economy

-Because input prices are completely flexible in the long run, changes in theprice level do not change firms' level of output. That means that LRAS is verticleat the economy's level of full employment.

Changes in SRAS

-increase in sras is seen as a shift to the right SRAS->

A decrease in sras is seen as a shift to the left SRAS <-

The key unit to understanding shifts ij sras is per unit cost of production 

-Per unit production cost= total input cost / total output-

Determinants of SRAS

INPUT PRICES

Domestic resource prices

.wages (75% of all buisness costs)

.cost of capital

.raw materials

Foreign reource prices

Market Power

Increase in resources prices = SRAS <-

PRODUCTIVITY

productivity = total output / total inputs

More productivity = lower unit production cost = SRAS ->

Lower Productivity = higher unit production cost = SRAS <-

LEGAL INSITUTIONAL ENVIROMENT

-Taxes and subsidies-

-Taxes ($ to govt) on buisness increase per unit production cost = SRAS <-

-Subsidies ($ from govt) to business reduce per unit production cost = SRAS ->

GOVERNMENT REGULATION

-government regulation creates a cost of compliance = SRAS <-

-Degregation reduces compliance costs

= SRAS ->

Full employment 

-full employment equilibrium exists where AD intersects SRAS & LRAS at the same points

Recessionary gap

-a ressionary gap exsts when equilibrium occurs below full employment output

Inflationary gap

-exists when equilibrium occurs beyond full employment output

AGGREGATE DEMAND

Aggregate demand curve

(Insert graph)

AD is the demand by consumers, businesses, governments, and foreign countries

What definitely doesn't shift the curve?

-changes in the price level cause a move along the curve

Why does AD downward sloping

1. REAL BALANCE EFFECT

-higher power levels reduce the purchasing power of money

-the decreases the quantity of expenditures 

-lower price levels increase purchasing power and increase expenditures

2. INTEREST RATE EFFECT

- when the price level increases, lenders need to charge higher interest rate to get a REAL on their loans

-Higher interest rates discourage consumer spending and buisness investment

3. FOREIGN TRADE EFFECT

-When U.S price level rises, foreign buyers purchase fewer U.S goods and Americans buy foreign goods

-Exports fall and import rise causing real GDP demanded to fall. (Xn, Decreases)

SHIFTERS OF AGGREGATE DEMAND

GDP = C + 1 + G + Xn

-change in C, Ig, G and Xn

-Multiplier effect that produces a greater change than the originial change in the 4 components

Increases in AD = AD ->

Decreases in AD = AD <-

CONSUMPTION

Household is effected by

Consumer wealth

-more wealth = more spending (AD >)

-less wealth = less spending (AD <)

Consumer expectations

- positive expectations = more spending (AD >)

-negative expectations = less spending (AD <)

Household indebtedness

-more debt = less spending (AD <)

-less debt = mores spending (AD >)

Taxes

- less taxes = more spending (AD >)

-more taxes = less spending (AD <)

Gross private investment

Investment spending is sensitive to

Real interest rate

-lower real interest rate = (less AD >)

-higher real interest rate = (less AD <)

Expected returns

-Higher Expected Returns= more investment (AD >)

-Lower Expected Returns = less investment ( AD <)

-Expected Returns are influenced by

-expectations of future probability 

-technology

-degree If excess capacity [Existing stock of capital]

-Business Taxes

Government spending 

-more government spending (AD >)

-Less government spending (AD <)

Net exports

-sensitive to 

Exchange rates (international value of $)

-Strong $ = more imports and fewer exports (AD <)

-Weak $ = fewer imports and more exports (AD >)

Relative income

-strong foreign countries = more exports = (AD >)

-weak foreign countries = more exports = ( AD <)