CLASS
NOTES FOR ECONOMICS 252/WEEK 7 OCT 4-6
DR.
WILLIAM SHINGLETON
PLEASE
NOTE: THE USE OF CALCULATORS IS ALLOWED ON DR. SHINGLETON’S QUIZZES AND EXAMS
BUT THEY CANNOT BE SHARED BETWEEN STUDENTS.
CELL PHONES CANNOT BE USED AS CALCULATORS.
ADD DATA REPORT/TALK ABOUT NEWS
LAST WEEK CH 10
AGGREGATE DEMAND: AT EQUILIBRIUM, SALES = PRODUCTION
SALES =
C + I + G + X - M
AT WHAT GDP DOES PRODUCTION = SALES?
EQUILIBRIUM GDP = SALES = C + I + G + X – M
MULTIPLIER PROCESS
MULTIPLIER W/O INCOME TAX
EFFECT OF SPENDING CHANGE
MULTIPLIER EFFECT/ADJUSTMENT CYCLE
dSALES => dGDP => dDPI => dSALES
FINAL CHANGE IS A MULTIPLE OF ORIGINAL CHANGE
THIS WEEK: FISCAL POLICY CH 11
FISCAL POLICY
DEFINITIONS
GOVT OUTLAYS = GOVT PURCHASES + TRANSFERS
2005 2.479 T 2006
2.567 T
PURCHASES
ARE THE G IN SALES = C
+ I + G + X – M
"UNCONTROLLABLE
SPENDING", NO KIDDING
DIRECTLY
AFFECT AGGREGATE DEMAND
TRANSFERS
ARE A NEGATIVE TAX
NOT
A FORM OF SALES
ADD
TO DPI, NOT AGGREGATE DEMAND
INCREASE
IN DPI ADDS TO CONSUMER SPENDING
DEFICIT/SURPLUS
OFFICIAL 2005
427 B 2006 390 B
DEBT/SOURCE: http://www.publicdebt.treas.gov/opd/opdpdodt.htm
TOTAL ONLY $7,914,012,303,376.60 29SEP05
PUBLIC $
4,606,272,846,357.54
Intragovernmental $ 3,307,739,457,019.06
TRUE 12 MONTHS DEFICIT $535,959,607,046.28
FISCAL POLICY LEVERS (OR
TOOLS)
GOVT PURCHASES
TRANSFERS
TAX RATES (NOT TAX REVENUES)
FISCAL POLICY GOALS
GROWTH
EMPLOYMENT
INFLATION
INTERNATIONAL VALUE OF THE DOLLAR (EXCHANGE RATES)
FISCAL POLICY LOGIC /
BARRO
IS THERE A PROBLEM?
CAN THE GOVERNMENT IMPROVE THE SITUATION?
IF A RECESSION IS CAUSED BY A LACK OF
DEMAND...
FISCAL POLICY
IMPLEMENTATION
FROM THE GENERAL THEORY
THEY COULD...
THEY SHOULD...
FISCAL STIMULUS OR RESTRAINT (MAYBE NOT RESTRAINT)
USE AD/AS TO EXPLAIN
CONSIDER
THE SHAPE OF AS
CONSIDER
MULTIPLIER EFFECTS
IN
ENGLISH
IN
ADJUSTMENT CYCLE
IN
ALGEBRA
PLUS
OR MINUS
IF
dGDP = M*dG
THEN
dG = dGDP/M
EFFECTS ON
GROWTH
EMPLOYMENT
INFLATION
INTERNATIONAL VALUE OF THE DOLLAR (EXCHANGE RATES)
DEFICIT
TAX POLICY
USE AD/AS TO
EXPLAIN
CONSIDER
THE SHAPE OF AS
CONSIDER
MULTIPLIER EFFECTS
IN
ENGLISH
IN
ADJUSTMENT CYCLE
PLUS
OR MINUS
IF
dGDP = TAX RATE MULTIPLIER*dTAX
THEN
dTAX RATE = dGDP/ TAX RATE MULTIPLIER
EFFECTS ON
GROWTH
EMPLOYMENT
INFLATION
INTERNATIONAL VALUE OF THE DOLLAR (EXCHANGE RATES)
DEFICIT
BALANCED BUDGET MULTIPLIER
IN ENGLISH
PUSHED TO THE
LIMIT
CURRENT ECONOMY
DOES THE GOVERNMENT NEED TO PUSH THE AD?
$2.4 TRILLION THIS YEAR
CAN THEY PUSH THE AD?
LIMITS TO FISCAL POLICY
CHANGE = MULTIPLIER *
NEW SALES
USE AD/AS TO
EXPLAIN INFLATION/UNEMPLOYMENT TRADE-OFF
PRICE
LIMITS
FULL EMPLOYMENT AND SHAPE OF AS
TARGET LEVEL OF
GDP
A
POLITICAL DECISION
TRADE-OFFS
DESIRED STIMULUS = (DESIRED GDP MINUS EXPECTED
GDP) /MULTIPLIER
WHAT IS THE DESIRED dGDP?
UNKNOWN UNLESS THE OTHERS ARE KNOWN
CURRENT FOCUS ON RATE OF CHANGE
THE IDEAL dG OR dTAX ASSUMES DESIRED dGDP IS KNOWN