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Macro Week 1 Class B Notes.docx

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Boston College
ECON 1132
Richard Tresch

Macro Week 1 Class B 01/16/2014 Economy—circular flow of economic activity Macroeconomic policy rules: a. Long run economic growth b. Full employment/low unemployment c. Low/no inflation d. Stability in international economic relations Goals (b) and (c) are known as the Great Tradeoff Policies that increase employment, AS A RESULT: increase inflation Increase inflation, AS A RESULT: decrease employment What is the best combination of fiscal policies and monetary policies? ANS: It depends. (1) The two policies do not always work in concert/harmoniously, and (2) The goals of each policy do not approach the same, mutual goal based on the economic circular flow Policy  Economy circular flow  Macroeconomic policy rules ^A policy’s ultimate goal is to abide by the macroeconomic policy rules through controlling the economy’s circular flow Fiscal Policy—Only the federal government can form a ‘fiscal policy.’ Changes in expenditures or taxes (1.) expenditures in the form of goods and services (resources) and 2.) transfer payments) to influence the level and the composition of the circular flow. It is the duel responsibility of the administration (who proposes budget and changes to an existing budget) and Congress (who debates it and approves it) Expenditures on goods and services (G)—resources using part of circular flow Transfer Payments (Tr)—not part of circular flow Motivation matters fiscal policy is a residual ask U—Graph with Public Sector (G—Expenditures on goods and services) on Y, Private Sector on X (Tr—Transfer Payments). In the middle of the curve is where production is highest Monetary Policy—Changes in the money supply to affect the level and compositio
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