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This looks so cool

EL FIN

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OVERVIEW

This is it!!!Fill in some gaps & details with those

taking the macro AP test

You’ve got the gist of macro

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Start at the Beginning

Day 1 we discussed the role of the gov’tWhy do they intervene in economy?

REGULATE THE BUSINESS CYCLE

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How can they tell?

Use GDP as biggest indicatorSpent a lot of time hereReal versus nominalCIGX & WIRPGDP, GNP, NDP, NEW, etc.

Why does it really matter?

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Cool Quote

“the government is charged with caring about all of us together, but none of use on our own”

Impossible for them to think about us individually

But it is the problems that affect us individually that makes GDP matter

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Big 3Inflation, unemployment, growthWith a partner answer the following:1. How do you calculate inflation?

Need equation for market basket, CPI, & inflation

2. Compare the 4 types of unemployment & define the natural rate

3. Draw two separate graphs depicting growth What needs to happen for economy to grow?

What specifically can you do to encourage that growth? Draw the loanable funds graph.

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These guys matter

Gov’t constantly trying to fight them allImpossible to do so simultaneouslyWhy?When will you see unemployment?When will you see inflation?

The two are typically opposites

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New Graph

Some Phillip guy figured it outPhillips Curve shows tradeoff between

the twoLRPC set at natural rate of unemploy

Can have a situation in which both increase

How?

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Supply Shocks

Sudden changes in AS curveCan go either wayDecrease in gas prices cause favorableNatural disasters cause negativeAS shifts to the left…what happens?Prices go up (inflation)Output goes down (causing reduced output,

which means people lose jobs)STAGFLATION

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We desire stability

No, actually we demand itGet very unhappy when not stableBlame gov’t

Can they really control it that much?

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Big, big, big budget

This year Obama’s budget is $3.6tUnparalleled amount of power/influenceBut can they really do whatever they want?NOPE for two reasons

1. only “control” so much spending 2. it involves Congress

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Bad music kills ears

Most of gov’t budget is actually MANDATORY SPENDING

Same concept as homeworkThings like safety netsCan only control DISCRETIONARYRelatively small portion of budget

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Vote them all out?

Congress has all time low approval rating (positive signs of late)

Couldn’t pass bill for emergency unemployment benefits

How can they agree enough to “fix” the economy?

Luckily we have AUTOMATIC STABILIZERS

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Auto pilot w/o sleeping

Some actions designed to kick in when needed w/o intervention necessary

When in recession, what fiscal policies need to happen?

Cut taxes & increase spendingThat happens w/o trying

How?

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Cruise Control at 105

When economy hurting it needs helpWe need helpPeople lose jobs or make less money

their taxes go downLikewise spending picks upMore people collect unemployment, food

stamps, etc.Taxes down & spending up w/o policySame works in reverse

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Still need more help

Role of gov’t to stabilize business cycleCan do so using FISCAL &

MONETARY POLICYFiscal--taxes & spendingMonetary--control of money supply

RR, DR, OMOCan use these guys to put economy

where we want it

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Need proof…look at picture

This is your ideal economySorry, wrong picture

QuickTime™ and a decompressor

are needed to see this picture.

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What does it look like?

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LRAS is our goal

X marks where we are atVertical line is our goalLRAS, potential GDP, natural rate of

unemployment, full employment

Any deviation needs fixed

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Have some choices

INFLATIONARY GAP Economy OVERHEATED

RECESSIONARY GAP Economy in a recession

ALL YOU NEED TO DO IS CLOSE THE GAP…HOW HARD IS THAT

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They are sure trying

But why are they failing?Who actually controls the economy?

Try as they might it is the CONSUMERS who control a larger portion of the economy

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Still know what to do

Just b/c they can’t fix it doesn’t mean we don’t know what needs fixed

AS/AD graph shows us what needs done

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Picture of fixing

X marks where we are…vertical marks where we want to be

Three options:1. Everything is good; E = V2. Recessionary Gap; V > E3. Inflationary Gap; E > VGoal is to get E = V

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Distance is easy

Distance btwn is what is neededDo you need to stimulate economy by

that entire amount?No,no,noRemember what happens when money

is spentSomeone else earns it, who then

spends it…etc.

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Same as MS multiplier

The same thing happens here as creation of money process

Money is earned, spent, earned, spent, earned, spent forever UNLESS IT IS SAVED

SAVING, NOT SPENDING, MONEY IS ONLY THING TO LIMIT THIS PROCESS

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APC, APS, MPC, MPS

Last big point of macroAPC = average propensity to consume

% of our income we spendAPS = average propensity to save

% of our income we save

As with micro, don’t focus on average but instead MARGINAL

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MPC

Marginal propensity to consumeWhen given another $, amount that we

spendMPS: same thing but amount that we

save

MPS + MPC = 1All money is saved or spent

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Works same as RR

1/RR is ms multiplierBanks saving money is the same thing

as us saving money (limits circulation process)

Expenditure multiplier then becomes

1/MPS or 1(1-MPC)

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Sample Recession

Say they want to stimulate the economy $200 billion

If the MPS is .2, how much should the gov’t increase spending to do so?

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Spending is Spending

Doesn’t matter whether it is by consumers, gov’t, for investment, etc.

Spending counts the sameChanges in taxes work a little bit

differentSo does the multiplier when considering

exports

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Tax Multiplier

When the gov’t raises taxes they take money we would have spent…but also take money we would have saved

TAX MULTIPLIER ALWAYS SMALLER THAN SPENDING MULTIPLIER

Some of the money would have been saved Likewise if the gov’t reduces taxes some of

the money will be saved

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End Result

Must reduce the value of the spending multiplier by amount of it actually spent

Spending multiplier = 1/MPSTax multiplier = (1/MPS) x MPC

Amount we spend of the change in taxesAlso written as MPC/MPSSometimes expressed as negative

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Open Economy Multiplier

When we save money it leaves our “spending cycle”

Likewise when we buy imports it does the same thing

OE multiplier then combines effect of both savings & buying imports

OE = 1 / (MPS + MPi)

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Practice

With a partner calculate each of the following multipliers: Spending: MPC = .9 Tax: MPS = .05 Spending: MPS = .3 Tax: MPC = .5 OE: MPC = .2; MPi = .05

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Part 2

Now fix the economyRecessionary gap of $500 billion…MPC

= .10…how much should gov’t increase spending?

How much would they need to cut taxes?

If MPi .1, how much would they need to increase spending?

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Another way to look at it

Keynesian CrossGDP as a picture

Autonomous spending = necessary regardless of income

Slope of Consumption Function = MPC

HOW CAN THE KC BE USED TO EVALUATE WHAT NEEDS TO HAPPEN TO THE ECONOMY?

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Bottom Line

Why does macro exist?What’s the gov’t’s job (since GP)?How can they do it?What influence do we have?

Saving, velocity of money, MPC

Connect the dots and you get the whole picture.