Announcements. Quiz: next class Ch. #19 Ch. #20 *Open notes don t mess this up

Transcription

1 Day #28 5/7-8

2 Announcements Quiz: next class Ch. #19 Ch. #20 *Open notes don t mess this up Test corrections: Mon., 5/7 Tues., 5/8 Weds., 5/9 Thurs., 5/10 Fri., 5/11

3 Corny Jokes 1. Who tells chicken jokes? COMEDI-HENS! 2. What lives under the sea and carries a lot of people? OCTO-BUS! 3. Why couldn t the sailors play cards? BECAUSE SOMEONE WAS STANDING ON THE DECK! 4. What do you call a kid who doesn t believe in Santa? A REBEL WITHOUT A CLAUS!

4 Themes Incentives are important in decision-making Choices always result in costs The economy is interdependent

5 Review: Ch. #19 1. What is fiscal policy and who conducts it? 2. What is monetary policy and who conducts it? 3. When is an expansionary fiscal policy used? What impact does it have? 4. When is an expansionary monetary policy used? What impact does it have? 5. When is a contractionary fiscal policy used? What impact does it have? 6. When is a contractionary monetary policy used? What impact does it have?

6 Review, Ch. #20 Fiscal Policy 1. What are the specific tools of an expansionary fiscal policy? 2. How does each tool impact GDP and unemployment? 3. When is an expansionary fiscal policy used? 4. What are the specific tools of a contractionary fiscal policy? 5. When is a contractionary fiscal policy used? 6. How does each tool impact GDP and the price level / inflation? 7. How are taxes different than government spending? 8. What are the tradeoffs or costs of expansionary fiscal policy? 9. What are the tradeoffs or costs of contractionary fiscal policy?

7 Ch. #21 Impacts of Fiscal Policy What you need to know 1. What is the budget balance? (How is it calculated?) 2. What is a budget deficit? 3. What are its causes? 4. What is a budget surplus? 5. What are its causes?

8 Budget Balance Budget balance = T (G +TR) T = taxes; income into US Treasury G +TR = spending out of US Treasury on government spending (G) and transfer payments (TR)

9 Budget Deficit Budget deficit = T<(G +TR) income is less than the spending out (or the spending out is greater than the income in) Potential causes: Expansionary fiscal policy Decrease taxes collected (not rates) Increase in transfers paid Political choices: Programs that spend more than tax revenue (income) collected: reflects priorities of the nation (structural issues with the budget how it is set up politically)

10 Budget Surplus Budget surplus = T>(G +TR) income is more than the spending out (or the spending out is greater than the income in) Potential causes: Contractionary fiscal policy Automatic stabilizers due to a recession: Increase taxes collected (not rates) Decrease in transfers paid Political choices: Programs that spend less than tax revenue (income) collected: reflects priorities of the nation (structural issues with the budget how it is set up politically)

11 Total Deficit

12 Total Debt

13 Total Public Debt as a Percentage of GDP

14 Deficit as a percentage of GDP (or income)

15 Budget deficit projections

16 Deficit and Economy

17 2015 Budget (from money.cnn.com)

18 Holders of US debt* *I AM NOT SURE HOW ACCURATE THESE NUMBERS ARE, BUT THEY ARE IN LINE WITH OTHER MORE REPUTABLE SOURCES; ALSO THESE NUMBERS CAN CHANGE

19 US Debt

20 Stand and share 1. What is the budget balance? (How is it calculated?) 2. What is a budget deficit? 3. What are its causes? 4. What is a budget surplus? 5. What are its causes?

21 Classwork Day #28 1. The budget balance is taxes minus. 2. A budget deficit will occur if government spending is (choose one: greater than / less than) taxes. 3. Assume the budget balance is initially zero and then taxes increase and government spending stays the same, what is the impact on the budget balance? (Choose one: deficit / surplus) 4. Assume the budget balance is initially zero and then an expansionary fiscal policy is used in a recession, what is the impact on the budget balance? (Choose one: deficit / surplus)

22 Ch. #26, Money What is money? Generally accepted

23 Ch. #26, Money Served as money Shells Feathers Animal skins Metal shapes Cigarettes

24 Ch. #26, Money Whale teeth: Fiji Tabua

25 Ch. #26, Money Characteristics of Money 1. Portable 2. Divisible 3. Durable 4. Easily recognizable

26 Ch. #26, Money The role / functions of money 1. Medium of exchange 2. Unit of account 3. Store of value

27 Ch. #26, Money 1. The central banks ensures that is fulfills its roles: a. Medium of exchange b. Unit of account c. Store of value This makes us want to continue using it.

28 Ch. #26, Money If the central bank does a bad job.

29 Measuring the Money Supply In economics and finance when we discuss money = NOT JUST CURRENCY Money? Depends on liquidity Count de Monet

30 Monetary Aggregates M0 M1 M2 near money These constitute the money supply Federal Reserve impacts the money supply = must impact the value of these measures (how much in each)

31 What gives money value?

32 Ch. #26, Money 1. US: Fiat money a) What is it? i. It is money that a government states is a medium of exchange, and will fulfill the other roles of money 2. What gives it value? a) Managed by the central bank (Federal Reserve in US) b) Monetary policy i. Regulating / managing the money supply in response to economic ii. conditions Changes in the money supply: Value of your money (other factors affect this, too, not just the Fed / central bank) Impact interest rates: pay for loans and thus purchases

33 Forms of money 1. Commodity money 2. Convertible fiat money a. Commodity backed money b. Representative money 3. Fiat money

34 Convertible fiat money (Commodity backed money; Representative money)

35 Gold Standard: commodity backed money

36 GOLD STANDARD DISADVANTAGES 1. No flexibility to respond to economic crises 2. Difficult to isolate country from the rest of world (although today this happens without the gold standard) 3. Responding to changes in international trade: difficult 4. DEFLATION IS BAD! 1. Punishes debtors (borrowers) ADVANTAGES 1. Limits government s ability to cause inflation 2. Fixes exchange rates: makes international trade easier 3. Does not all for wealth to be transferred from creditors to debtors (inflation reduces the value of debt). SOURCE:

37 GOLD STANDARD In 2012 a poll of 40 U.S. economists in the IGM Economic Experts Panel found that none of them agreed with a claim that a return to the gold standard would result in "price-stability and employment outcomes [that] would be better for the average American." The panel of polled economists included past Nobel Prize winners, former economic advisers to both Republican and Democratic presidents, and senior faculty from Harvard, Chicago, Stanford, MIT, and other well-known research universities

38 Gold Standard and FDR People were trading in their paper money for gold (at $20.67 per ounce) because they did not trust banks. To keep money in banks the Federal Reserve had to keep interest rates high Executive order 6102 / Gold Reserve Act: Paper money was no longer convertible to gold raised price of gold to $35 per ounce (turn money into gold at that price) The end of Western civilization

39 Gold Standard and Nixon (Nixon Shock) Gold standard after WWII part of the Bretton Woods System Exchange rates fixed to US dollar = US dollar fixed to gold US dollar could be converted to gold at $35 an ounce All international trade was conducted in dollars US exported a lot of goods = no need to trade US $ in for gold (needed to buy US goods) Japan, West Germany compete with US for exports (and win) = US share of exports decline Need less US $ to buy stuff (because buying from Japan, West Germany, etc. = convert to gold) US loses share of gold and does not have enough to meet value of $

40 Summary As long as money is needed (fulfills its roles and functions) and has value it can have an impact on economic activity Confidence in banking system and its ability to hold currency The central bank s job is to ensure it has value and is used in economic transactions. Central bank does this through monetary policy and other regulations.

41 Stand and share 1. What is money? 2. What are the roles and functions of money? 3. What is fiat money? 4. What is commodity money? 5. What is commodity backed money? 6. What counts as part of the money supply? 7. What role does the central bank play with the value of money?