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Uncle Sam wants y ou to do better in economics.

Macroeconomics. Uncle Sam wants y ou to do better in economics. Limits,. Alternatives,. Choices. and. ECONOMICS - “science of scarcity”. - the study of the choices people make in an effort to satisfy their unlimited needs and wants from limited resources .

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Uncle Sam wants y ou to do better in economics.

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  1. Macroeconomics Uncle Sam wants you to do better in economics. Limits, Alternatives, Choices and

  2. ECONOMICS - “science of scarcity” -the study of thechoicespeople make in an effort to satisfy theirunlimited needs and wantsfromlimited resources. The science of “scarcity”

  3. 8 Economic Goals 1. Economic Growth 8. Favorable Balance Of Trade 2. Full Employment Eight Economic Goals 7. Economic Security 3. Economic Efficiency 4. Price Level stability 6. Economic Freedom 5. Equal Distribution Of Income

  4. Expansionary Fiscal Policy E [Increase “G” or decrease “T” [ME of 4] Full $20 Billion Increase in AD AD2 LRAS AD1 $5 Billion in additional government spending Price Level Or decrease T by $6.67 billion [MT of -3 x -$6.67 billion = $20 B] PL1 SRAS $490 YR Real GDP $510 YF

  5. Flat Tax on Income: same % of income, different amounts, soProportional Flat Tax on Products: same amount, different % of income, so Regressive 39.6% 33% 28% Marginal Tax Rates Progressive – takes a larger % from high income groups 25% 15% 10% Single - no tax on 1st $8,925 I only have to pay the FICA tax. 28% 25% 10% 15% 33% 39.6% $400,000+ $87,850 $8,925 $36,250 $183,250 $398,350 0 Standard Deduction [$6,100-dependent] [$17,850-married filing jointly] [$12,750-HH] [8,925-single]

  6. Proportional&Regressive Taxes Proportional– takes same 20% [not amount] from all income groups 20% Example: Medicare– 1.45% on all income earned. $100,000 $50,000 $40,000 $30,000 Pay $20,000 Pay $10,000 [So, not same amount but same %, 20%] Take that, you “low incomer.” 30% Regressive– takes a larger % from low income groups 20% Example: Sales Tax I’m a “low incomer.” 10% $40,000 $50,000 $30,000

  7. And – how did former President George W. Bush do in college economics? Let’s take a look at his college transcript.

  8. President Bush’s College Transcript Gov. 73 /71 Econ 71/ 72 President Bush’s overall average 77 Gore’s average was even worse. Kerry’s overall average 76.

  9. Now Let’s take a look at James Richard (Rick) Perry’s Econ Grade

  10. And Now For Governor Perry’s Transcript Major: Animal Science Econ D "This was not the brightest guy around. We always laughed at him. He was always pretty much a joke.” Classmate

  11. Perry’s Transcript – Last Two Years Major: Animal Science “So - If you are having ahard time in economics, don’t worry about it. You are on schedule to be President of the U.S., or at least a governor.” His transcript included 1 F, 9 D’s, 27 C’s, 20 B’s and two A’s. One problem – he missed every 3rd answer on tests.

  12. LRAS PL AD Shifters [C+Ig+G+Xn] Consumption Ig (gross investment) Government Spending [infrastructure, military spending, health care] Xn [Net exports] AS Shifters [REP] Resource cost Environment [legal-institutional] 1. Subsidies, 2. Business taxes, 3. Business regs. Productivity SRAS2 AD2 SRAS1 AD1 CIG-X SRAS2 AD2 103 YR RGDP Y* YI Aggregation – we are combining all prices into price level&combining all quantities intoReal GDP(Y). Yindicates 3 things: 1. Output[GDP] 2. Income 3. Unemployment YR – Recession gap YI– Inflation gap Y* – Full Employ. Don’t confuse FE output with the economy’s maximum output, which is thelarger output that would be produced if everyone were forced to work as much as possible.

  13. Change in AQD AD PL1 [Inverse] PL2 AQD1 AQD2 AQD PL

  14. Change in AQS There go some of my profits! AS PL1 PL2 [DIRECT] AQS1 AQS2

  15. C Change in AD 1. “Non price Level” change-either C, Ig, G, or Xn 2. “Whole AD curve” shifts [There is a change in AQD but it is not caused by a change in price level.] Consumption Katy PerryConcert Ig AD2 AD1 AD3 G PL Let there be health care for everyone. XN RDO AQD3 AQD2 AQD1 Corvette Ferrari [Exports-Imports]

  16. Change in AS Anything that lowers the cost of production will shift AS right. 1. “Non price level change”. EitherR, E, or P 2. “Whole AS curve” shifts. 3. AQS changes but is not caused by a change in PL AS Shifters(REP) 1. Resource cost 2. Environment [legal-institutional environment for businesses change, affecting production costs [subsidies, bus. taxes, regulations] 3. Productivity AS3 AS1 AS2 So – AS Shifters are REP Increase in the availability of Resources PL You save money. We don’t require dental or medical insurance. You don’t have to pay us a pension and we don’t take sick days. And – we can dance. 1. Lower business taxes 2. Decrease in regulations 3. Increase in subsidies Environment [Legal-institutional] AQS1 AQS3 AQS2 Increase in Productivity

  17. The Multipliers [MPC = .75] [ME(1/MPS);MT(-MPC/MPS), &MBB(“1”] [If there is a Recessionary Gap] [If there is an Inflationary Gap] Inflationary Spending Gap Recessionary Spending Gap LRAS LRAS SRAS SRAS AD1 AD2 AD1 AD2 +25 -25 PL SRAS SRAS PL + 100 B - 100 B YR700 Y* 800 YI900 Y* 800 RGDP RGDP Recessionary GDP Gap Inflationary GDP Gap AD/AS Model Simplifications For Demonstrating Fiscal Policy • The AS curve will be horizontal. • PL will not change to decrease impact of fiscal policy [dotted line AS is reality] • We will ignore the impact of taxes, imports, and price level. • In other words, “suspend reality” to demonstrate fiscal policy actions. • But then, we are “always suspending reality” in economics.

  18. Multipliers [ME, MT, &MBB] MT = -MPC/MPS = -.90/.10 = -9 [Change in T - always negative] MPC-MPC/MPS = MT .90 -.90/.10 = -9 .80 -.80/.20 = -4 .75 -.75/.25 = -3 .60 -.60/.40 = -1.5 .50 -.50/.50 = -1 ME = 1/MPS = 1/.10 = 10 [change in G, Ig, or X] MPC1/MPS = ME .90 1/.10 = 10 .80 1/.20 = 5 .75 1/.25 = 4 .60 1/.40 = 2.5 .50 1/.50 = 2 MBB = “1” [“1” x “Change in G”] MPCMPSMBB .90 .10 1 .80 .20 1 .75 .25 1 .60 .40 1 .50 .50 1 The MBB is always “1” because of two multipliers. One is positive and one is negative. 1/MPS+ -MPC/MPS = 1- MPC/MPS = MPS/MPS = “1” 1/.20 + -.80/.20 = 1- .80/.20 = .20/.20 = “1” 1/.50 + -.50/.50 = 1- .50/.50 = .50/.50 = “1”

  19. ME = 1/MPS, 1/.25 = $1/.25 = ME of 4 ME is 4 & we are short of Y*[$800]by $60 billion Recessionary Spending Gap Full $60 Billion Increase in AD AD2 AD1 LRAS Increase G by $15 billion Price Level PL1 SRAS +60 Recess. Gap $740 YR Real GDP $800 YF Recessionary GDP Gap “M” = Y/ E = 60/15 = 4

  20. MT= -MPC/MPS, -.75/.25 = MT of -3 MT is -3 & we are short of Y*[$800]by $60 billion E Recessionary Spending Gap Full $60 Billion Increase in AD AD2 LRAS AD1 $20 Billion Tax Cut Price Level PL1 SRAS +60 -3 x -$20 = $60 bil. Recess. Gap $740 YR Real GDP $800 YF Recessionary GDP Gap

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