government policies to address… macro – unit 5 – part 2 and
TRANSCRIPT
Government Policies to Address…
Macro – Unit 5 – part 2
and
______ _____ policies – seek to improve the economy by shifting the _____ curve towards ______________ -- monetary & fiscal policy
Types of Policies
If an economy is not at full employment equilibrium or does not show growth there are 2 types of policies a government may pursue:
AD
______ _____ policies – seek to improve the economy by shifting the _______ curve out – (1) tax subsidies for investment, (2) encourage R&D, (3) encourage trade
equilibrium
LRAS
Demand side
Supply side
A. Demand Side Policies
______________ ______________Fiscal Policy Monetary Policy
1.
2.
1.
2.
3.
Taxes Gov’t Spending
discount rate
required reserves open market operations
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A. Demand Side Policies
May cause problems
deficitTo fund _______ spending, governments must borrow increasing _______ rates _________ out private Investment.
interest
So if M ___
1.
2.
crowding
M V = P Q
P
Thus expansionary policies may cause inflation.
A. Demand Side Policies
May cause problems
3.Short Run Trade-Off Between Unemployment & Inflation
PL
SRAS
AD2005
LRAS
AD1PL
Y Y1
PL1
Q=realGDP=Y
Is this economy at full employment?
What happens if the Gov’t seeks to improve employment?
3.Short Run Trade-Off Between Unemployment & Inflation
Inflation Rate (Percent / year)
Phillips Curve
3%
4% 7%
6%
Unemployment Rate (percent)
In 1958 British Economist A.W. Phillips published an article on the relationship between unemployment and inflation.
Phillips CurveWhen inflation lowered from 6% to 3%, what happened to unemployment?
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Phillips based his curve on unemployment & inflation data he collected in Great Britain from 1950-1968:
Colander, p. 696
Inflation Rate (Percent / year)
Phillips Curve
3%
4% 7%
6%
Unemployment Rate (percent)
What’s a good trick to remember which axis is labeled which?
Phillips Curve
Inflation is same as PL
Employment = GDP = Y is always on this axis.
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But after the paper was published and the Phillips Curve was widely accepted, look what happened to the data.
In the Long Run
Inflation Rate (Percent / year)
L-R Phillips Curve
3%
4%
6%
Unemployment Rate (percent)
Economists Milton Friedman and Edmund Phelps later published papers in 1968 denying the existence of a short-run Phillips Curve.
L-R Phillips Curve
Having more $ printed can’t make more people work.
Monetary growth may cause inflation, but that is just an increase in the price level; having more money printed does not affect “real” variables such as output and employment.
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Rational Expectations – people optimally use all the information they have, including information about government policies when forecasting the future
When economic policies change, people adjust their expectations of inflation accordingly. The expected price level affects nominal wages.
A. Demand Side Policies
May not be effective b/c of …
54. According to the theory of rational rational expectationexpectation, a fully anticipated fully anticipated expansionary monetary policyexpansionary monetary policy will a. increase potential output b. increase unemployment c. have no impact on real output d. promote the production of consumer goods over capital goods e. result in deflation
Consumers would anticipate higher inflation &Consumers would anticipate higher inflation &at contract time ask for higher wages than inat contract time ask for higher wages than inthe past. Firms would not experience increasingthe past. Firms would not experience increasingprofits so the economy would not expand.profits so the economy would not expand.
From 2005 exam
52% got it correct
B. Supply Side Policies
______ _____ policies – seek to improve the economy by shifting the _______ curveLRASSupply side
PLLRAS
AD
SRAS1
PL
Q
PL2
Q2
AD2
computersLRAS1
housing
Shifting out the LRAS is the same as shifting out what other curve?
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Long-Run Economic Growth
Significance of growth: higher GDP indicates a higher standard of living
Why such large differences in living standards around the world? Primary Reason:
Productivity
Country
Real GDP / person in 1900
Growth Rate / year
Real GDP / person in 2003
Japan $1,280 $28,620 2.79%
Mexico $ 987 $ 8,950 2.16%
USA $3,412 $37,500 1.82%
Pakistan $ 628 $ 2,060 1.16%
Long-Run Economic GrowthProductivity – the quantity of goods & services
produced from each unit of labor.
Determinants of Productivity
Physical Capital / Worker – stock of equipment & structures that are used to produce G & S
Human Capital / Worker – knowledge & skills acquired thru education, training & experience
Natural Resources / Worker – land, rivers, mineral deposits
Technological Knowledge
1.
2.
3.
4.
Long-Run Economic GrowthPublic Policy to Promote Growth
Saving & Investment – capital is a produced factor of production, so a society can invest its resources into producing more capital. To invest more a society must s________ more and c_________less.
Investment from Abroad
Education
Health & Nutrition
1.
2.
3.
4.
5.
6.
7.
8.
9.Property Rights
Political Stability
Free Trade
R________ & D_________
Population Growth
ave onsume
esearch evelopment
Important aspects:
dollar amount
multiply
1. The multiplier model allows a prediction of a ____________ of the output of the economy.2. If you’re told the multiplier is 4, the multiplier model proves that just a $100 change in G will _________ and increase the economy by _______.
$400
3. The Keynesian/multiplier model assumes ____________ is constant.price level
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some questions for review
some questions for review
What are the 3 curves drawn in the AS / AD model?
PL
Q=realGDP=Y
LRAS
Y
AD
SRAS
Why is LRAS vertical...what does it represent?
some questions for review
In this particular drawing is the economy in a recession, inflationary period or at equilibrium?
PL
Q=realGDP=Y
LRAS
YF
AD
SRAS
What is LRAS frequently labeled? Explain why.
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Keynesian Range
Intermediate Range
Classical Range
Single Aggregate Supply curve consists of 3 parts...
alternative format to draw AS/AD model....
label?PL
label?
label?AD
Y = Real GDP =Q
Which range is which?
Keynesian RangeIntermediate Range
Classical Range
Keynesian Range
Intermediate Range
Classical RangeWhat is represented if the economy is at this point?
alternative format to draw AS/AD model....
PL
AD
Y = Real GDP =Q
YFFull employment income..which is ____% unemployment.
5
Where would you draw AD curve to show an inflationary gap?
PL
AD
Y = Real GDP =Q
YFY1
Long-Run Economic Growth In the USA real
GDP/capita has grown by about ___% / year. This is known as the _________ growth trend.
PL
Q=realGDP=Y
LRAS
YF
AD
SRAS
How would you illustrate long term growth on this graph?
LRAS1
Y1
2
secular
So what if you’re told there’s a decrease in G? What does it affect?
G is a part of ....
PLLRAS
YF
AD
SRAS
PL
Q
PL2
Q2
AD2
GDP=Y=Q24 of 27
PLLRAS
YF
AD
SRAS
PL
Q
PL2
Q2
AD2
GDP=Y=Q
Now that you know what shifted, it might ask... what happened to output? where do you look? what happened to inflation?
what happened to employment?
what happened to income?what happened to the overall level of prices?
So what if you’re told there’s an increase in the discount rate? The discount rate is the interest rate the Fed charges banks to borrow money. ____ ____ ____ & ____ ____
PLLRAS
YF
AD
SRAS
PL
Q
PL2
Q2
AD2
iMS ICAD
Crowding out
The government should spend the money it earns through ______. If the government it spending more than it’s taxing, it is conducting ______ spending. To spend what it doesn’t have, the gov’t needs to ________ money. The government borrowing money increases the demand for __________ funds which drives the ____ up. With the interest rate up, private investment is _______ ___.
deficit
taxes
borrowloanable
i
crowded out27 of 27