ECON 101 Lecture Notes - Lecture 9: Ad Valorem Tax, Fiscal Policy, Monetary Policy
1 May 2018
School
Department
Course
Professor
Economics 101
Lori Leachman
Part 8 • Lecture
• Beggar Thy Neighbor Policy
o Remedy economic problems with trade policy that benefits home country while harming other
economics
o Increasing demand for domestic goods (exports) while decreasing volume of imports
o Uses tariffs/quotas... etc
• Impose tariff on imports to improve CA deficit
o Results in retaliation that decreases exports, and sets you back to initial position (CA deficit)
o Decrease in imports decreases quantity of HC in circulation and HC appreciates, decreasing
exports (domestic goods become more expensive to foreigners)
• U.S. fiscal situation: CA deficit (< 0) and FA inflow (> 0) - borrowing from rest of world
o Increasing deficit (more spending & tax cuts) - have to borrow for deficit spending
o U.S. exhibits very low savings rate
• Tariffs and quotas: Protection measures for domestic suppliers
o Tariff - tax specific to a good being imported
▪ Ad valorem tax: percentage tax of price
▪ Lump sum tax: flat fee
▪ Graphically similar to imposition of excise tax - decreases Supply
• As market grows and demand increases so price also increases
o Provides some protection for domestic producers, but does not
capture all the growth (some growth goes to foreign producers)
▪ More protectionist if economy shrinks
▪ Tariffs are immediate
o Quota - set quantity that can be imported
▪ Sets hard constraint (a fraction) of quantity imported (horizontal fraction of excess
demand [imports])
▪ As market grows, all growth goes to domestic producers
▪ More protectionist if economy grows
• Becomes useless/non-binding if economy shrinks
▪ Quotas can be set in advance
• Aggregate Demand and Supply
o PL (inflation, price level) on y axis and real GDP (employment, income) on x axis
o Aggregate Demand = total spending in the economy (C + I + G + Xn)
▪ AD downsloping
• Wealth effect - lower price levels increase real wealth and more consumption
spending
• Interest rate effect - lower price level leads to lower i (lower p in fisher
equation), lower i means more investment
• Foreign price effect - lower price level causes domestic goods to be cheaper
and (more favorable) and increases exports
▪ Moving along AD - changes in composition of spending (C + I + G + Xn)
▪ AD shifts
• Expansionary - increase AD:
o Fiscal policy: tax cuts, increased spending (government)
o Monetary policy: lower interest rates, increase money supply, increase
investment/consumption
• Contractionary policy - decrease AD:
o Fiscal policy: increased taxes, less spending (gov)
o Monetary policy: increase interest rates, lower money supply,
decrease investment/consumption
o Aggregate Supply = total output = GDP = Y
▪ AS upwards curving
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