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Uncle Sam wants y ou to do better in economics

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Uncle Sam wants you todo better in economics.

Limits,Alternatives,andChoicesMacroeconomics

ECONOMICS - science of scarcity-the study of the choices people make in an effort to satisfy their unlimited needs and wants from limited resources.

The science of scarcity

8 Economic GoalsEight Economic Goals1. EconomicGrowth6. EconomicFreedom3. Economic Efficiency4. PriceLevelstability5. EqualDistributionOf Income7. Economic Security2. Full Employment8. FavorableBalanceOf Trade

Real GDPPrice LevelAD1AD2SRAS$490 YR$510 YFPL1

LRAS

EExpansionary Fiscal Policy[Increase G or decrease T [ME of 4]Full $20 Billion Increase in AD$5 Billion in additionalgovernment spending Or decrease T by $6.67 billion[MT of -3 x -$6.67 billion = $20 B] Single - no tax on 1st $8,925 39.6%33%28%25%15%10%$8,925$183,250$398,350Standard Deduction[$6,100-dependent] 0$87,850$400,000+$36,25010%15%25%28%33% 39.6%Marginal Tax RatesFlat Tax on Income: same % of income, different amounts, so ProportionalFlat Tax on Products: same amount, different % of income, so RegressiveI only have to pay the FICA tax.

Progressive takes a larger % from high income groups [$17,850-married filing jointly][$12,750-HH][8,925-single]

Regressive takes a larger % from low income groupsProportional & Regressive Taxes

$100,000

Proportional takes same 20% [not amount] from all income groups20%$30,000$40,000$50,00020%30%10%$30,000$40,000$50,000Take that, you low incomer.

Pay $20,000Pay $10,000

[So, not same amount but same %, 20%]Im a lowincomer.Example: Medicare 1.45% on all income earned.Example: Sales Tax

And how did former President George W. Bush do in college economics?

Lets take a look at his college transcript.

Econ 71/ 72Gov. 73 /71 President Bushs overall average 77Kerrys overall average 76.President Bushs College TranscriptGores average was even worse.

Now Lets take a look at James Richard (Rick) Perrys Econ Grade

And Now For Governor Perrys Transcript"This was not the brightest guy around. We always laughed at him. He was always pretty much a joke. Classmate

Econ DMajor: Animal Science

Perrys Transcript Last Two Years

His transcript included 1 F, 9 Ds, 27 Cs, 20 Bs and two As. Major: Animal ScienceSo - If you are having a hard time in economics,dont worry about it. You are on schedule to bePresident of the U.S., or at least a governor.

One problem he missed every 3rd answer on tests.

SRAS1PLY*RGDP

AD Shifters [C+Ig+G+Xn]ConsumptionIg (gross investment)Government Spending[infrastructure, military spending, health care]Xn [Net exports] AS Shifters [REP]Resource costEnvironment [legal-institutional] 1. Subsidies, 2. Business taxes, 3. Business regs.ProductivitySRAS2YIAggregation we are combining all prices into price level & combining all quantities into Real GDP(Y).Y indicates 3 things: 1. Output[GDP] 2. Income 3. Unemployment YR Recession gap YI Inflation gap Y* Full Employ.Dont confuse FE outputwith the economys maximum output, whichis the larger output thatwould be produced if everyone were forced to work as much as possible.

CIG-XAD2YR

103AD2AD1SRAS2LRAS

AD PL1

AQD1 [Inverse]PLAQD

AQD2

PL2

Change in AQDASPL1

AQS1[DIRECT]

AQS2

PL2

There go some of my profits!Change in AQSAQD31. Non price Level change-either C, Ig, G, or Xn2. Whole AD curve shifts[There is a change in AQD but it is not caused by a change in price level.]

Let there be healthcare for everyone. ConsumptionKaty Perry ConcertG

Ig Corvette FerrariXN[Exports-Imports]CPLAQD1AD2AD3AD1

RDO

AQD2

Change in ADChange in AS1. Non price level change. Either R, E, or P2. Whole AS curve shifts.3. AQS changes but is not caused by a change in PL PL

AQS1 AS3AS1AS21. Lower business taxes 2. Decrease in regulations 3. Increase in subsidies

Increase in Productivity

You save money. We dont require dental or medical insurance. You dont have to pay us a pension and we dont take sick days. And we can dance. AQS2AQS3

Anything that lowersthe cost of productionwill shift AS right.

So AS Shifters areREPAS Shifters(REP)1. Resource cost2. Environment [legal-institutional environment for businesses change, affecting production costs [subsidies, bus. taxes, regulations]3. Productivity

Increase in the availability of ResourcesEnvironment[Legal-institutional]

PLAD2AD1LRASSRAS

The Multipliers [MPC = .75]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. AD/AS Model Simplifications For Demonstrating Fiscal PolicyRGDPRecessionary GDP GapRecessionary Spending GapSRASPLSRASAD2RGDPLRASInflationary Spending GapInflationary GDP GapAD1SRAS[If there is a Recessionary Gap][If there is an Inflationary Gap]

[ME(1/MPS); MT(-MPC/MPS), & MBB(1]YR 700Y* 800+25+ 100 BY* 800YI 900-25- 100 B

17ME = 1/MPS = 1/.10 = 10[change in G, Ig, or X]

MPC 1/MPS = ME.901/.10 = 10.801/.20 = 5.75 1/.25= 4 .601/.40 = 2.5.501/.50= 2

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

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 = 11/.50 + -.50/.50 = 1- .50/.50 = .50/.50 = 1Multipliers [ME, MT, & MBB]Real GDPPrice LevelAD2SRAS$740 YR$800 YFPL1

LRAS

Increase G by $15 billion

ME = 1/MPS, 1/.25 = $1/.25 = ME of 4ME is 4 & we are short of Y*[$800] by $60 billion

Recessionary GDP Gap+60

Recess. GapM = Y/ E = 60/15 = 4Recessionary Spending GapAD1

Full $60 Billion Increase in ADReal GDPPrice LevelAD1AD2SRAS$740 YR$800 YFPL1LRAS$20 Billion Tax Cut

E

Recessionary GDP Gap+60

Recess. GapMT = -MPC/MPS, -.75/.25 = MT of -3MT is -3 & we are short of Y*[$800] by $60 billion-3 x -$20 = $60 bil.Recessionary Spending Gap

Full $60 Billion Increase in AD