PowerPoint Presentation
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
