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Muzzi SG4.docx

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1 Debates (continued)  discretion and time lag problem *graph 1. recognition lag: takes time to figure out where our economy is (6 months) a. same for fiscal and monetary 2. decision lag: amount of time it takes for there to be a decision made on what to do a. monetary policy shorter here (ex. board meets every 6 weeks 12 people) 3. implementation lag: takes a while to take action and implement a. monetary policy shorter here (ex. interest rates go down) 4. effectiveness lag: to see results a. monetary policy has longer lag here (ex. wait for people to spend tax cut) b. fiscal shorter here  discretionary: step on gas right when econ is growing, then they have to step on brakes right away = more volatile business cycles MAKES THINGS WORSE  if we should just pick a rule, what rule? o stabilize economy, reduce business cycle waves o PHILLIPS RULE  origin  graph RULE BASED POLICIES graph*  targeting r o procyclical  same direction  ex. recession (down) govt does concessionary (down)  bad  targeting m o counter cyclical  monetarists  different ways  graph one o animal spirits go down, AD goes left  graph two o prices and output falls, demand shifts left (less money in pocket) o interest rates fall o fed has to sell bond, MS shifts left THE PHILIPS CURVE graph** -focuses on inflation and unemployment  origin  relationship to AD & AS graph*  1970s and stagflation graph* o stagflation: high rates of inflation with high unemployment rate o high price, stagnant output  friedmans explanation 2 o AS shifted left in 1970, phillips curve doesn’t predict this (price up unemployment goes up) o things will jump off short run Phillips curve and self correction will move it onto the long run Phillips curve o Keynesians believed AS never changed ( Phillips curve) high inflation = low unemployment (?) DEFICITS and DEBTS  deficit v. surplus o govt revenues – govt spending o 2.7trill – 3.7 trill 2012 o revenue: taxes o spending: G and TP o deficit: spending > revenues o surplus: revenues > spending  balanced budget o if it equals zero  public debt o govt continuously runs deficits o accumulation of deficits o 37 out of last 40 years for US (16 trill)  current vs. debt  debt to GDP ratio o best way o amount of debt (16 trill) / size of economy (16 trill) = 100% o japans is 200% Greece 160% Italy 130%  future outlook for US TRADE (Revisited)  Benefits from trade o both countries benefit  Trade restrictions o these policies hurt most people (pay more) but protect small producers who have the loudest voice 1. quota: quantity restriction 2. tariff: tax placed on imports  restriction on free trade  govt collects tax 3. voluntary export restraint: ask foreign country to voluntarily export less  WHY? politics. the benefits of free trade are spread out>> benefits are small  ex. protects our milk and sugar producers, Americans pay more without free trade  ex. ask japan to restrain cars in early 80s. created a line of luxury cars (sell less, high profit)  Free trade: o foreign producers win 3 o consumers in America win o domestic producers in an industry that does not have the comparative adv. lose  Trade restriction justification 1. transition costs  people lose jobs, towns lose jobs  unemployment = welfare, crime  move out of the town: move to an overcrowded place  cities need to find a new economic purpose  too expensive 2. national defense  ex. if we stop producing steel how do we make weapons, tanks  protect certain industries b/c if we go to war, we need them 3. health and safety  ex. chinese steel does not have the same standards  higher health and safety standards 4. labor and environmental standards  they have lower labor standards  child labor and 30 cents a day wage, proper disposal of chemicals  we cant compete 5. infant industry  ex. we want to start selling TVs again  we need to protect baby industries  Economists’ responses to justifications 1. transition costs  we accept that free trade equals costs (retrain workers, relocate)  govt can provide programs for these  everyone benefits from buying cheaper products so we should help pay for these programs  implement over time, not right away  NAFTA (15 years) 2. national defense  it prays on peoples fears  are we going to war with everyone? there will be allys and neutrals  we are completely advantage in our military indu
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