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Muzzi SG3.docx

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University of San Francisco

1 FISCAL POLICY  what is it? o actions/ plans/programs taken in order to affect macroeconomics (production, general prices, employment)  who conducts it? o congress + president  3 tools 1. taxes 2. govt purchases 3. transfer payments  what is the most effective tool? o demand siders think:  believe in big govt  aggregate demand is important  get everyone to spend  govt purchases  Y=C+I+G+NX  increase G by 200 Y goes up 800 (G is IN GDP, govt decides the spending)  multiplier is 4 (1/1-.75)=1/.25=4 MPC-75  increase TP by 200 > individual saves a portion > spends later (C) > $150 in C (200x .75=150) > output Y is 600 (this is where you mult by the multiplier, after the individual decides how much to spend)  a tax cut is the same as a transfer payment (disposable incomes changes) o tax cut -200 => disposable income +200 => C +150 => y +600 o supply siders think:  for smaller more limited govt. money to citizens  aggregate supply is important  spending money doesn’t create jobs  production and output is important  make people want to work more, producers want to produce more  cut taxes in 4 ways 1. income taxes o they will want to work more, they get to keep more o 2. taxes on savings income o the interest you make when you loan money out is subject to govt taxing o people will save more o loan more o businesses more loanable funds to by capital to produce more o 3. taxes on capital game income o govt taxes on your resales (property, stocks, assets) o 4. taxes on corporations 2 o more money available to train people, buy physical capital, engage in research and development o  supply side policy  criticisms….. supply side . demand side. o cut income taxes > they might go on vacations (work less) tax people more so they have to work harder to make the same money. how is the govt suppose to run? > just reduce taxes that create a reduce in production not eliminate it o supply side arguments:  tax less = more money= want to work  reduction, people will work twice as much, govt will get more  making 100,000 * 33% = 33,000  now making 200,000 * 20% = 40,000 o demand side arguments:  tax more = need more money = will want to work more  if you cut taxes it shifts aggregate demand > spend more. you guys exaggerate supply side and ignore demand effects  unfair to the poor  ex. rich 100,000 *30% = 30,000  poor 10,000 *30% = 3,000  cut by 10% = 20,000 & 2,000 o rich saves 10,000 poor gets 1,000 >> he gets 10x the savings  algebra for actual multiplier (with leakages) o calc* MONEY  three functions o medium of exchange  helps facilitate  in a world without money you need a double coincidence of wants (I can give you what you want and you can do something I want and its about the same value) o unit of account  measures value  loses this quality if it isn’t used as a medium of exchange o store of value  no expiration date (like bananas)  ability to maintain value  commodity money vs. fiat money o fiat money: dollars that we use  fiat means by govt declaration o commodity money: has intrinsic value (gold)  gold can also be used as jewelry  ex. cigarettes in prisons  desirable characteristics 3 o durability o portability o uniformity  gresham’s law: When a government overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation  ex. $2 bill o fixability: amount of money that is out is there is controllable o no counterfeitability o divisibility: ability to divide  measuring money o m1 (2 trillion)  available money  currency and coins  checking deposits (demand deposits)  traveler’s checks o m2 (6-8 trillion)  everything in M1 +  money market rate accounts (like checking but gives interest)  savings accounts  double or triple all of M1 BANKING  origins o gold o goldsmith holds gold for the miner (originally charged to hold), gives receipts to him saying he was the receipt (money, bank note) o they realized the gold would just sit there and people wanted to borrow the gold>>banks realized they can make money, charge them for o lend out money they don’t own o take money from people who have it but aren’t productive and give it to people who don’t have money but have productive purposes o encourage depositors to deposit more>> wont charge you+ will give you interest  how banks make money (part1, how they make a profit) o pay depositors a low interest rate o charge borrowers a high interest rate o ex. bank has $100,000 in deposits pays them 1% interest  allowed to loan 80% of the money on deposit (required reserve ration (RRR)= 10% in America>> minimum)  charges 5% interest rate to borrowers  profit= $3,000  (80% * 100,000) = can loan out ($80,000 * 5%) = $4,000 – (10,000 *1%)= 3000  they also have to pay for administrative costs so really only make may $1,000  how banks make money (part 2, literally makes more money in our system) o re-produce the money in an economy 4 o multiplier of loans *graphs  money multiplier o simple money multiplier:  (1/RRR)* ∆monetary base = ∆ money supply  ex. (1/.1)=10 * 10,000 = changes $ 1 million  monetary base: notes and coins in circulation outside the central bank.  Monetary supply:all the money circulating in the economy including the monetary base. o actual money multiplier: banks don’t just hold onto the minimum they hold more  (1/RRR+ERR)  ERR: excess reserve ratio  ex. banks hold 25% (25-10% =15%)  ERR=15%  changes $400,000  problem with banks o bank runs/ panics  don’t have the money to back it up  if everyone decides to pull out money (rumor)  bank run : happens to one institution  panics: happens nationwide, can create system fail o moral hazard (of bank)  take your money>> lend it out if they lose it they lose it, sorry  they can make a profit and keep it  federal deposit insurance corporation (FDIC) o if your money does not exceed $250,000 it is guaranteed o 600,000 >> you would put 200,000 under 3 accounts at 3 different banks o its by tax payer ID number (per person) o moral hazard: even worse. you give money to bank and you don’t care where they invest because your money is insured. banks don’t care where they invest.  the federal reserve bank (1913) o what is it?  central bank of the US  quasi governmental: almost governmental  private institution o who owns it?  owned by member banks in the area (territory)  but don’t control it  SF has one, other major cities have one for nearby states  one big entity divided by 12 districts o w
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