Economics 110

2-5-07
Homework – Negative income tax
Permanent income hypothesis – expenditure is based upon permanent income
1776 – Wealth of Nations
Friedman pushed for school vouchers
Monetary policy – the use of Federal Reserve tools to manipulate the economy
Fiscal policy – the use of government spending and taxation to manipulate the economy
Deficit – spend more than you take in
Recession – a downward trend in the business cycle where income, output, and
employment are decreasing.
Business Cycle – a period non-recurrent fluctuation in the economy
GDP – the total market value of all final goods and services produced in an economy in a
given year.
GNP – the total market value of all final goods and services produced by an economy in a
given year.
2001 and 2003 – Bush tax cuts
Milton Friedman wanted a constant money supply rule – he wanted it should grow 3.5%
every year for stability – no more guessing what the Fed will do – 3.5% matches GDP
growth – you could no longer use discretionary monetary policy
Asset – something you own that has value
Liability – something for which you are responsibly to pay
Assets minus liabilities = net worth
Negative net worth = insolvent
C&C = coins and currency
Reserves at the Federal Reserve – self explanatory
Government Securities
T-bill – usually 3-12 month
T-Note – 1-10 years
T-Bond – above ten years
National Debt is in the 8 trillion dollar range
Demand Deposits – Checking accounts
Savings Deposits – savings account
Time Deposits – for a certain length at least – CD’s (certificate of Deposit)
Correct terms on reserve –
• Legal (or actual) reserves – C&C + reserves at the Fed
Required reserve – a percentage of the T,D, and S deposits
Excess = legal reserves – required reserves
M1 – most liquid form of money supply
• C&C (20% of the money supply)
• DD (70%)
• Traveler’s Checks (less than 1%)
2-2-07
Target is $20,000
50% negative income tax
You just made $14,000 - $3,000
Flat tax – a proportional tax – the percentage tax stays the same as the base increases
Progressive – our current system
JFK – 1961 – 91% was the highest marginal tax rate
Reagan – 1980 – highest was 70% down to 28%
Homework – CPI for Germany, Yugoslavia, Hungary
CPI
Milton Friedman – “Inflation is always and everywhere a monetary phenomenon.”
You can’t have inflation without manipulating the money supply
Three tools of the Fed in a Recession
• Open Market Operations – buying and selling of Gov. Sec. (most used)
• Change the Reserve requirement (rarely used)
• Change the discount rate (fairly often)

Discount rate – the interest rate that the Fed charges Financial institutions
The Fed is very independent
Technically and legally the Fed is a private corporation
How does the Fed make money? (It makes a bunch.)
Homework – what is the Chairman of the Fed’s salary?
Economics – the science of allocating scarce resources with alternate uses so as to
minimize the wants of society.
Opportunity cost – the cost of what you forgo by choosing something else
Sunk cost – something you have paid and can’t get back
Marginal – additional – slope of the total function – first derivative in calculus
Diminishing terms to studying

Germany –
July 1922 = 1
January 1924 (18 months later) = 750,000,000,000

Yugoslavia –
January 1993 = 1
January 1994 = 600,000,000,000,000

Hungary –
June 1945 = 1
June 1946 = 828,000,000,000,000,000,000,000,000

2-9-07
Positive economics – descriptive (what is)
Normative Economics – the way it should be (value judgment)
Microeconomics – one business, industry, market, person
Macroeconomics – deals with the whole economy
GNP – The value of all final goods and services produced by an economy.
Utility – satisfaction
Factors of production – things that are needed in order to produce
• Land (natural resources)
• Labor (personnel)
• Capital (plant and equipment)
• Entrepreneurship (risk taker)
Economic returns to the factors of production
• Labor – wages
• Land – rent
• Capital – interest
• Entrepreneur – profit
Unintended effects
Homework – make a demand curve for reckless driving
Ceteris paribus – all other things constant
All other things being equal
In economics “y” stands for income
Will use infinity
With a forty-five degree line both values are the same if the scaling is the same
Homework – read chapter 2

2-12-07
PPF – all the possible combinations of two goods that can be produced with a certain set
of resources
A PPF with constant opportunity cost is a straight line
A concave PPF shows increasing opportunity costs
Under the PPF is a point with unemployed resources
Indifference curve – any point on an indifference curve give you the same amount of
utility/satisfaction
Utils – measurement of satisfaction
Law of diminishing marginal utility – you get less utility for each marginal addition
With each successive unit of a product you consume you will get less and less additional
satisfaction.
Rational Man – we are making rational decisions
Mercantilism – to drain resources from a colony and bring it back to the mother country,
gold
Adam Smith
Absolute advantage – with a given set of resources I can outproduce you
Zero Sum game – a complete balance between trade partners
Positive sum game – both sides gain
Comparative advantage – produce where you have the greatest advantage or the least
disadvantage.
One country cannot have a comparative advantage in both goods
IN general economists like free trade
People like trade when you have a level playing field
The farmer in the US is being subsidized
The Great Depression = BAD
The reason why is that most countries were putting on tariffs and quotas
Dumping – international dumping is when you sell a product in another country at a
lower price than what you sell it for in your home country – used in order to put
international competition out of business
Homework: send your parents a valentine

2-14-07
Demand – the amount of good people are willing and able to purchase at various possible
prices within a given time.
Law of Demand – Price varies inversely with quantity demanded.
A change in demand is a shift of the demand curve
Determinants of Demand –
• Changes in tastes and preferences
• Changes in disposable income
• Changes in the number of buyers
• Changes in the prices of related goods
• Expectation of Future price
Market demand is the horizontal summation of individual demand curves
Personal income tax decreased
Normal Good – a good that when personal income increases demand increases
Inferior Good – a good that when personal income increases you buy less
Poison milk – powdered milk mixed with regular milk
When the price of the substitute increase the demand for the original product increases
When the price of the compliment increases the demand for the original product
decreases
A change in quantity demanded is a movement along the original demand curve
Supply – the amount of goods and services suppliers are willing and able to produce and
offer for sale at various possible prices
Determinants of Supply –
• Change in Technology
• Change in resource costs
• Change in the number of sellers
Change in supply = a shift in the supply curve
Change in quantity supplied = a movement along the supply curve
Price floor – a legal limit on how low you can sell a product for
Price ceiling – a legal limit on how high you can charge for a product
Homework – 1930s Wheat is selling for $2 a bushel – Government sets a price floor at $3
a bushel – make a graph of it
Price Ceiling – 1973 – gasoline example – market price is $.60 – price ceiling was set at
$.40 – rationing to solve the shortage
Homework – Berkeley California – the going rate for an off campus room was $300 – the
city counsel put a ceiling at $200 – graph and tell problem
QUIZ
2-16-07
You want to know the percent increase in the market
Homework – Read A10 on Thursdays WSJ
Ways to counteract a surplus
• Increase demand
• Decrease supply (increase corporate income tax)
• Pay a producer not to produce
• Give the surplus as foreign aid

Ways to counteract a shortage:

• Get rid of the price ceiling

Why does the demand curve slope downward?

1. Law of diminishing marginal utility (pp. 63)
2. Substitution effect – as the price of a product goes up we will substitute out of that
product and into something else
3. Income effect – as prices increase your purchasing power decreases

Why is it important to know what the demand curve looks like?

TR – Price times quantity sold

When we make policies that influence the economy we ask economists what’s going to
happen to
• Consumer Surplus – the area below the demand curve down to the market price
• Producer Surplus – the area above the supply curve up to the market price
• Dead Weight loss

Homework – read chapter 4

2-19-07
8.25 is the prime rate as of 2-16-07
Prime interest rate is the rate they charge to their best customers
6.25 is the discount rate
The Federal Funds rate moves all day long
If at the end of the day a lot of banks are reserved deficient then the Federal Funds will
go up
FOMC – Federal Open Market Committee
The Discount rate will stay the same for at least six weeks
Pension plans – agreed payments over time according to your standing with the company
401K – a retirement plan through your employer
Homework – find out what you can about empirical evidence about Min. wage
Dialysis is a cost

2-21-07
Antitrust – suits that prevent monopolies
Subscribers are increasing at an increasing rate
Glass ceiling – top on how high you can go in an industry
Homework – Labor force participation rate for women and for men; graph of the last 50
years
Opportunity costs
Leisure – the opportunity cost for men to give it up is high; it is low for women
Work
Whenever the quantity being produced is not equal to the market clearing quantity you
are likely to have a misallocation of resources.
What happens to consumer and producer surplus and in the whole process do we end up
with a dead weight loss.
Dead weight loss – an area that used to be a surplus but is no longer wither one
EXAM – surplus graph pp. 105
I’m not going to pay – usually not true – Time is the price you pay
EXAM – Demand and supply and price for highways
Homework – Read chapter 17
Elasticity – deals with responsiveness
Price elasticity of demand – how does quantity demanded respond to a change in price
Generally elasticity – a change in the numerator = the numerator responds a little
Elasticity = %change in Qd/% change in P
Arch elasticity is the elasticity is what we use – between points
A one percent change in price leads to a (elasticity) change in quantity demanded.

2-23-07
Homework – invested $100,000 in the Dow Jones in Jan. 1 1989 and likewise in Japan
Arc elasticity is averaging the elasticity across the range
Elastic = relatively elastic
Wool is unitary elastic
Assumption for perfectly elastic –
• Homogeneous product
Whenever you have something that is inelastic a price raise will increase total revenue.
When you have elasticity a price raise will decrease total demand.
Nikkei - 38,915.87 to 18108.79 = 20807.08 = 46% drop = $46,000
Dow - 2,256.43 to 12686.02 = 2,256.43 = 562% increase = $562,216.42
2-26-07
Diminishing Marginal utility – with each additional unit of consumption less and less
pleasure is gotten
Risk aversion – concave utility function
Indifferent – same level of utility for different goods
Optimal consumption rule – consumer equilibrium – the equation of equality relating the
utility per dollar of two goods

2-28-07
Sub-prime loan – that’s made to people with poor credit
Alan Greenspan said that it was time
Shanghai dropped 9%
Hedging – historically used as an insurance policy
Hedge fund – go in and buy and sell futures – very risky – tend to have more money
Equity fund – looks at what’s going up and goes for a sure thing
Banks keep reserves for bad loans outside the required reserves
It is a sign that banks are doing well if they don’t have much in reserves for bad loans
FDIC has a lot of money because very few banks have failed

When you put a tax on the item it shifts the supply up vertically by the amount of the tax
Homework – make a relatively elastic tax graph
Homework – Appendix to chapter 18

QUIZ
3-2-07
Cigarettes excise tax – consumers pay most
Indifference curve characteristics –
• Indifference curves have the same value at any point on the curve
• They slope downwards
• Tend to be convex
• A shift to the right is an increase in utility
• Indifference curves should never intercept
• Indifference curves fill the plane (graph) – every point on the graph has an
indifference curve
Homework – chapter 19

3-5-07
Budget line
EXAM – draw a demand curve derived from a graph with budget lines and indifference
curves

EXAM – 12 Multiple choice, 12 definitions, then graphing

Adam Smith is a classical economist

Based mostly on a perfectly competitive market
Shirking – not doing what you’re supposed to be doing

Three types of Businesses

• Sole proprietorship
o You make your own decisions
o You get all the profits
o You’re only taxed once
o Easy to start
Business plan is essential to get a loan for start up.
Big drawback is unlimited liability
Not perpetual

• Partnership
o You have help with startup
o Double the workforce
Bad: you have to share the profits
Unlimited liability

• Corporation
o Limited liability
o Lots of capital
o Division of labor

Corporate income tax has to be paid at about 35%

Then the corporation pays dividends and puts some back in (retain earnings)

Discounted bond – you only pay a portion of the total principle and the interest builds
until you reach the total principle and then you can collect

EXAM
3-9-07
Option – the right to buy a stock at a certain price within a certain time period
Many execs get options as part of their pay
Fed’s beige book – economic report from all 12 Federal Reserve areas and what they
think is going to happen
Accounts receivable – something owed to you
2/10/30 = 2% discount if you pay me within 10 days of receiving the bill and you owe it
to me in 30 days
Homework – make a production function
Homework – first 10 pages in chapter 20
TP = total product
MP = marginal product = change in output/change in input (usually labor)
AP = average product
Important relationship between total average and marginal output

3-12-06
Point of inflection – the point where the increasing changes from increasing at an
increasing rate to increasing at a decreasing rate

Marginal will always go through the peak of average

Marginal leads the average –
If marginal is above the average the average will be going up
If marginal is below the average the average will be going down
A ray drawn from the origin to any point on the total product curve; the slope of that ray
will be average product

EXAM – production function without numbers

Break even = normal profit
Economic profit = excess profit = profit
Total fixed costs – a cost that does not vary over a production period
Variable costs – costs that varying as production numbers vary
FC + VC = TC (fixed costs + variable costs = total costs)
Homework – read the rest of chapter 20

3-14-07
P=AR=MR=d
In perfect competition the price remains the same

3-16-07
Manfred’s rules –
• Always produce where the slope of the Total revenue curve is equal to the slope
of total cost curve – where they are equal is the Q line
• Where the Q* line intersects TR is the firms total revenue
 • Where the Q line intersects TC is the firms total cost

The Slope of TR = MR
The slope of TC = MC

Always produce where MC = MR

3-26-07
Leading economic indicators
Homework – lookup the ten leading economic indicators
A firm will shutdown when they are unable to cover all of their variable costs
Fab’s rules
• Always produce where MC = MR and we call that our Q line
• Where the Q line intercepts the AR will be the firms price
• Where the Q line intersects the ATC is the firms cost per unit
Homework – Q = 20 Profit = 40 Cost per unit = 8 – make a total and average curve
diagram with these numbers

The 10 components of the Index include:

1. Average weekly hours worked by manufacturing workers

2. Average number of initial applications for unemployment insurance
3. Number of manufacturers' new orders for consumer goods and materials
4. Speed of delivery of new merchandise to vendors from suppliers
5. Amount of new orders for capital goods unrelated to defense
6. Amount of new building permits for residential buildings
7. The S&P 500 stock index
8. Inflation-adjusted monetary supply (M2)
9. Spread between long and short interest rates (the yield curve)
10. Consumer sentiment

3-28-07
IPO = Initial Public Offering
Homework – in the book
Characteristics of a constant cost industry
• As time passes there is generally no reason for the cost structure to increase or
decrease
• Generally the labor force will be semi skilled or unskilled
• Generally the input being used represents a small portion of the total input’s use
• Little technology changes

Characteristics of a decreasing cost industry

• As time passes there are reasons why the cost structure will decrease
• There is a good chance that the industry has something to do with technology
 • External economies to scale

Characteristics of an increasing cost industry

• As time passes there are reasons for the cost structures to increase
• Quite often the labor force is a skilled one
• The input being used to produce the product represents a large portion of the total
input’s use
Sarbanes Oxley – passed after the Enron scandal saying that the accountants can’t be the
same as the auditors

3-30-07
Futures contract – today I will make a contract with you that you will pay me so much for
something at a future date
Capital goods – plant and equipment
Hedging – historically a form of insurance
Futures contracts are a form of insurance
Tombstone – an advertisement for stock bonds and other stuff
Prospectus – gives information on a company such as what it does, who is on the board,
ceos, a balance sheet, an income statement
Imperfect forms of competition has price seekers
Monopolistic characteristics
• One seller
• Lots of buyers
• Unique product
• Entry and Exit – next to impossible
• Demand curve for the monopolist is the same as the demand for the firm

Local monopolies are utilities

Homework – look up the length of patents
Homework – make a shutdown monopoly

4-2-07
Homework – read chapter 23
Oligopoly is an industry that is dominated by a few firms
• Few firms
• Hard entry and exit

Type one oligopoly

• Limited number of buyers
• Homogeneous product
• Industrial

Type two has

 • Heterogeneous product
• Lots of buyers
• Consumer products

Kink demand curve oligopoly

• If one firm raises their price no one else follows
• If one firm lowers their price everyone follows

The break between the two marginal revenue curves of kinked demand curve oligopolies
is greater the greater the discrepancy between the slope of the two revenue lines.

Oligopolies that have a kink in it tend to have prices that are sticky. And tend to be so
around the kink.

They are sticky because of total revenue. Prices stick around the kink in the demand
curve.

Homework – look and see what they tried to do in Canada – they put a huge tax on
cigarettes in an effort to keep people from starting

Cartel oligopoly – a group works as one

QUIZ
4-4-07
Diffusion index – tells us what percent of the market are doing something (could be any
aspect of the surveyed) – Not only does it tell us the extent of what’s happening it also
has recent historical importance
Mutual fund – a collection of stocks
Indexed mutual fund – a fund that follows an index
Homework – read about price discrimination
Price discrimination – selling things at different prices to different people

Buying a car
• They ask what you will pay in a monthly payment say no
• You want to know the invoice price of the vehicle
• They still make a profit at invoice – hold back is a certain percentage they will
make no matter what – manufacturer incentives as well (per model or brand)

4-6-07
Price Discrimination
First – discrimination among buyers
Second Degree – discrimination by quantity – airlines
Third Degree – discrimination by group/time/types

No load mutual fund – no commission

Loaded – pay a commission
Closed end fund – not taking more money

Homework – finish graphs for monopolistic competition

Perfect vs. Imperfect
• Price is lower with perfect
• Quantity is greater in perfect
• Efficiency – producing output at the lowest possible cost
• MC = P – economists like this because P is the value to consumers – If we get the
price = MC then the cost to produce it is exactly equal to our value of it.
Perfect competition – MC = P
A long run average cost curve is developed from he tangent points on the short run
average cost curves.
Moving the cost structure down in economies of scale
• More efficient machines
• Division of labor
• Learning by doing, you create more efficient ways to do things
• Supplies in bulk
Diseconomies of scale
• Bureaucratic cost lost

EXAM
4-9-07
Unemployment is at 4.4% - very very good
Natural Rate of unemployment – natural number of transfers – 4.5-6%
Homework – pp. 587-588 and Ch. 6
Marginal Revenue profit – MRP = the additional profit in regards to a cost
Unemployed – in order to be so
• Be looking for a job
• Be capable of work
o Children (Under 16)
o Disabled
o Incarcerated
• Must be willing to work
• Must be without work

Bureau of Labor stats sends out surveys to 60,000 families every month
Definition of the labor force
Total population
- those not capable
= potential labor farce
- unwilling or not looking for work
= active labor force
- military personnel
= Civilian Labor Force = CLF
- those employed
= unemployed

Unemployment rate is Unemployed/CLF * 100 = unemployment rate

137.3 Million in 1998 – unemployment was 6.23 million

2006 4.3% overall unemployment
Higher or lower unemployment groups
o 16-19 year olds – higher (lack of education)
o Men – higher
o Women – lower
o White – lower
o Black – higher
o Asian – lower
o Hispanic – higher

Women make less than men for some jobs historically why
o Glass ceiling
o Risk of maternity leave
o Higher labor jobs
o Location – men moved and women followed

4 different types of unemployment

Business cycle – recurrent non-periodic fluctuation in business and economic activity
Recession (Classic) – two consecutive quarters in which GDP was negative
Recession (Neo) – a downward trend in the business cycle in which employment, output,
and spending is going down

GDP is made up of three different types of spending

o C = Consumer spending – largest component of GDP
o I = investment spending
o G = government spending
o Nx = foreign spending – exports – imports
General or cyclical unemployment – unemployment caused by too little total spending in
the economy.
How do we solve General Unemployment
Increase spending
• Reduce taxes on personal and corporate
• Lower interest rates raises I spending
• Increase Government spending

1930s – really high - 25%

In the same time frame parttime employment increased bigtime
Underemployment – skyrocketed…
Safety Nets – we have these today and they would make a large unemployment number
harder to bear because it would topple over the government via spending

1940-1945 – very very low unemployment – 1-1.5%

Several Million came into the labor force who never expected to go into the labor force

Recession times since 1945

48-49
53-54
57-58
60-61
69-70
73-75
80
81-82 – worst since the great Depression
90-91
01

4-13-07
Options market
An option gives you the right to purchase a stock at a specific price at a specific time
Options tend to be very risky
Striking price – the price for which you can by it

Structural unemployment: unemployment that is caused by a mismatching of jobs and

workers skills
• Can be due to a decrease in the demand for a specific type of labor
o A change in technology
o A declining demand for a particular product can cause structural
unemployment
• An increase in the supply of a specific type of labor
Solving structural unemployment
o Retraining programs
o Incentives for the unemployed industries
 o Government sponsored relocation

Seasonal unemployment: unemployment that reoccurs regularly during the same season
of the year
o Nature can cause seasonal unemployment
o Social customs
Solving seasonal unemployment
o Compliment seasonal employment

Frictional Unemployment: When we are unable to synchronize job endings and job
beginnings (generally shorter)
Solving frictional unemployment
o Don’t quit a job until you have another one
o Intermediate institutions

4-18-07
Tremendous pent up demand for consumer good caused rampant inflation during 1946-
1947

Early 50s – psychological inflation – people were remembering shortages and rationing –
people bought a lot more than they needed (hoarding) in fear of a WWIII – rising
demand curves caused higher prices caused inflation – there really wasn’t any need for
saving therefore it was psychological

61-62 – Kennedy was the pres and US Steel wanted to raise prices – if the price of steel
rose then the prices of everything else would rise as well – Kennedy requested them to
keep the prices down (jawboning) – mid 60s Johnson was the pres and he couldn’t keep
them from raising prices

Late 60s – high inflation from the Vietnam War

71 – Nixon was pres – he put in a wage and price freeze to solve the problem of inflation
– his Republican base was enraged with price restrictions – increasing benefits and
changing model and changing job titles got around the freezes

74-75 – inflation hit double digits – oil (opec was formed) – backed up inflation from the
freezes hit now

Homework – lookup the CPI from 1975 until present and the inflation rate since 1984
and the prime interest rate from 1975 till present

Late 70s-present – 79-80 was around 12-13%

Burns Accommodated the demand for money

Volcker keeps supply within the target
1981 – prime interest rate went up to 20.5%
GDP = C + I + G + Nx

Volcker helped to cause the greatest recession since the Great Depression, but when you
have a problem you have to pay a price to fix it.

Types of inflation –
• Demand pull inflation – Inflation caused by too much total spending in the
economy.
o It generally takes place at or near full employment
o Usually blamed on consumers
Solving Demand pull inflation
o Let interest rates increase
o Increase taxes
o Decrease G spending

Phillips curve – the trade off of inflation and unemployment

Cost push inflation –

• Caused by power groups within society
o Labor unions
 Escalator clauses – an automatic increase in wages
• Escalator clause 1 – where wages are attached and adjusted
to the inflation rate – you don’t know what you’re going to
get but you will beat inflation
• Escalator clause 2 – has a specified amount of wages – set
increases in wages – you don’t know that you will beat
inflation
o Monopoly powers
 OPEC
Solving cost push inflation
• Prevent use of escalator clauses
o In 1979, Carter said that anyone who had a government contract you have
to limit your wage increases to 6%
• Wage and price freeze
o Nixon tried this one
o Stronger antitrust laws

Homework – get the data points for the unemployment rate and the inflation rate from
1960 to the present – graph them from 60-83 – make two copies – leave the dots
unconnected of one and connect them on another

Keynesian Phillip’s curve shows the tradeoff between inflation and unemployment
2/3 of the cost of doing business is labor
EXAM – wage and price spiral

ECONOMIC GROWTH
We measure economic growth with GDP
Nominal GDP – GDP not adjusted for inflation
Real GDP – GDP that is adjusted for inflation
Every year nominal GDP goes up
Real GDP does not go up every year

Real GDP per capita is a very accurate estimate of an economy’s growth

• Adjusts for inflation
• And population

Homework – look at Nicaragua – 79% live on less than $2 a day – 40% on less than $1 a
day – find their per capita GDP - $908

What things help a country grow

• Natural resources
o Oil
o Bauxite
o Lumber
o Coal
o Natural Gas
o Water
o Fertile Soil
o Sun
• Real capital goods
o Plant and equipment
o Infrastructure
• Human capital
o Skilled workforce
o Healthy workforce
o Tech Savvy workforce
• New technology
o New production means
o New products
o New ideas
 Joseph Schumpeter – said that you need to break tech into
invention and innovation
• Sociopolitical environment – you have to have a stable country

Theory Z of management – family style of management

4-22-07
Employment act of 1946 – said that one of the chief economic goals for our economy is
to have the government concentrate on keeping unemployment low
Stagflation – a stagnating economy along with inflation

Theory X of management – autocratic management – flows from the top down – very
command oriented
Theory Y – workers input is more important – more group decision making – more
teamwork
Theory Z – Japanese – the company is your family – you stay there your whole life

Two sector circular flow diagram

Keynesian Economics
• Arguably the most influential economist of the 20th century
• LEFT!!!
• Government control – particularly in fiscal policy

Three most famous books in economics

• Wealth of Nations (1776)
• Das Kapital (Marx, 1850)
• The General Theory (Keynes, 1936)

Multiplier effect – if you make a small change in injection or a leakage and it results in a
larger change in total

Homework – a=60, b=2/3 – graph it – change I by 15 – show new set of numbers with a
C+I curve – change G by 20 – graph C+I+G and show final equilibrium

QUIZ
4-25-07
FINAL CHAPTERS – 5-7, 10-12
When stock markets are going in the opposite direction of ours – it helps to diversify risk
by investing in other stock markets
Injection – if they go up the economy expands
• Investment spending
• Government spending
• Exports
Leakages – if they go down the economy contracts
 • Taxes
• Imports
• Savings

Homework – understand the multiplier process a = 50 b= 4/5 – make a consumption and

a savings function – change I by 10 and note the increase in income

4-27-07
In equilibrium ejections = leakages
0 injections and 0 leakages at intersection of I and Sf
MPC = 2/3
The initial spending with taxes is different than the initial spending with G or I
Budget balance multiplier
Up to the Great Depression we had classical and neo-classical economists
Keynes – “In the long run we’re all dead.”

4-30-07
Government expenditures
• Transfer payments – a payment made by the government to consumers for which
consumers do nothing in return, at that time.
• Military
• Interest on the national debt
Three largest sources of income
• Personal income tax
• Social security taxes
• Corporate Income tax

Excise tax – a tax on a particular item

Homework – find tax brackets, tax on a quart of Alcohol in Kentucky

Our tax system is a progressive graduated marginal tax rate

Marginal tax rate – pay per bracket/amount
0 – 30,000 = 15%
30 – 70,000 = 20%
70 – 150,000 = 30%

EXAM
The family makes $80,000

Tax evasion – illegal means of not paying taxes

Tax avoidance – a legal means of not paying taxes – generally for people who have
higher incomes
 • Municipal bond – local bonds – tax free

FICA
7.65%
6.2% goes to SSI
$93,000 is the max

What has the Federal Gov done to make the sales tax less regressive

Tax Year:

Filing Status:
If your taxable income is your tax bracket
between... is:

and %

and %

and %

and %

and %

and %

5-2-07
Indexing – when you adjust something for inflation
SSI is indexed
Tax brackets are indexed
Indexing did not take place until the mid 80s
Bracket creep – moving up tax brackets when inflation is not met with indexing
In China they just increased the observe requirements for banks and tightening the money
supply
Pension fund – a retirement plan

FISCAL POLICY – the use of government spending and taxation to manipulate the
economy
2001 – tax cuts – fiscal policy
Increase the money supply – monetary supply
Old rules of public finance (Adam Smith)
• The purpose of government spending – to provide goods and services which
strictly private arrangements would not provide enough of
o Military
o Infrastructure
o Education
 o Legal system
• The purpose of taxation is to provide money for number one.
• The government budget rule – never spend more than you take in

New Rules of Public Finance in the 1930s (Paul Samuelson)

• Ditto ditto ditto plus to help solve the problem of inflation and unemployment
• Purpose of taxation – ditto ditto plus to help solve the problem of inflation and
unemployment
• The government budget rule
o If we find the economy in a recession the budget should move in the
direction of deficit
o If we find the economy in an inflationary period the budget should move
in the direction of surplus

EXAM:
Counter-cyclical discretionary fiscal policy – attempts to break the cyclical downturns
Counter-cyclical discretionary monetary policy – same thing with different tools
Externality – events beyond control that affects the values of other things in its area

MONEY:
How do you know if a society has money – universal medium of exchange

M1 – the most liquid form of money

• Coins and currency
• Checking accounts
• Travelers Checks

FEDERAL RESERVE
Created in 1913
Started working in 1914
It’s our central bank
12 districts
Technically and legally a private corporation
Commercial banks own the Federal Reserve – called member banks
Very independent mainly because it does not need money from Congress
A nonprofit organization that makes $10s of Billions a year
It is there to help the federal government

5-7-07
Multiple expansion of the money supply
Assumptions
• Reserve requirement is 20%
• When you take out a loan you take it all in your checking account
 • The bank loans out all excess reserves
• To get the process started a little boy finds a $1000 in his grandparents’ basement

We don’t get the maximum because:

• All banks don’t always loan out all their excess reserves
• People don’t always take out loans in DD

EXAM: Balance sheet, correct terms, punch it into the max increases in money supply

The Federal Reserve Monetary Policy weapons

• Open market operations
• Reserve requirement
• Discount rate

Use of these tools during a recession

• Buy gov. sec.
• Lower the requirement
• Lower the interest rate

Use of these tools during inflation

• Sell gov. sec.
• Raise the requirement
• Raise the interest rate

5-9-07
Misery index – unemployment + inflation
Today – 7.5%
1976 election: Carter and Ford (incumbent): 7.7% + 5.75% = 13.5%
1980 election: Reagan and Carter (incumbent): 7.1% + 13.5% = 20.6%
1984 election: Mondale and Reagan (incumbent): 7.5% + 4.3% = 11.8%
1988 election: Ducaucus and Bush (incumbent): under 10%
1992 election: Clinton and Bush (incumbent): 10.6%
1996 election: Dole and Clinton (incumbent): 6.3%
2000 election: Gore (incumbent) and Bush: 7.7%
2004 election: Bush (incumbent) and Kerry: 8.1%

Chapter 7