Transcript Current Issues In Economics

Macroeconomic Theory
The Business
Cycle
• The business cycle refers to the ups and
downs in the economy
• Sometimes the economy grows so fast that
inflation drives up prices
• Sometimes the economy slows down in a
recession with rising unemployment
Recession and Inflation
• Recession is at least six months of
“negative growth” in the economy, with
rising unemployment and declining output
• Inflation is at least six months of rising
general price levels
• Because it takes six months to know if we
are in a recession or inflationary period,
we say there is a recognition lag of 6
months
Classical Economics
• Classical Economics is based on three
ideas:
– Say’s Law Supply creates its own demand
– Self-regulating markets laissez-faire no
government interference
– Equation of exchange Ms x V = P x Y
Money Supply x Velocity = Price x output
The Aggregate Demand
Aggregate Supply Model
• See graph on the board
Questioning Classical
Economics
• Thomas Malthus and
population growth
• Karl Marx and the evil of
profit
Historic Business Cycle
• Series of “panics”
– 1819 panic
– 1836-1843 depression
– 1857 panic
– 1869-1871 panic
– 1893 panic
– 1901 panic
– 1929 Great Depression
The Great Depression
• The Stock Market crash of 1929
• The Smoot Hawley Tariff Act
• Drought
• The Hoover Administration
A New School
of Economics
• John Maynard Keynes
• The General Theory of Employment,
Interest and Money
The Total Expenditure Model
• See graph on the board
Keynesian Economic Plans
• Recession:
• Increase government
spending
• OR
• Decrease taxes
• Inflation:
• Decrease government
spending
• OR
• Increase taxes
Keynesian Multipliers
• Government multiplier
• =1/(1-mpc)
• Tax multiplier
• =mpc/(1-mpc)
Keynesian Fiscal Policy
• 1. Identify gap (recession or inflation) and
amount
• 2. Find mpc
• 3. Calculate multipliers
• 4. Calculate needed policy change:
– Gap = Gov’t spending x multiplier
– Gap = Tax change x mulitiplier
Deficits and Debt
• If the government spends money it doesn’t
have (hasn’t collected in taxes) the
government runs a deficit
• Add all the deficits together from 1776 until
today and you have the National Debt
• http://www.usdebtclock.org/
• http://www.babylontoday.com/national_de
bt_clock.htm
The National Debt
National Debt Problems
• Foreign owned sector is increasing
• 40% of the National Debt is now held by
our own government, so we’ll have to pay
taxes to pay ourselves
• 22% of the National Debt is held by other
countries and we’ll have to tax ourselves
to pay those other countries
Assets and Liabilities
•
•
•
•
Remember Accounting 1000?
Assets and Liabilities
The National Debt is a Liability
Where’s the National Asset Clock? What
did we buy with our National Debt?
What else (besides government)
makes economies grow?
• Capital “Deepening”
– More “capital per worker” can make those
workers more productive and increase output
• Labor Growth
– More workers
• Technological Progress
– New ways of doing things, new inventions
which are more efficient
National Budget
• The past administration ran up huge
deficits and added trillions to the National
Debt. The current administration is doing
the same.
• Could you do better? Try your hand at
balancing the Federal Budget by playing
the Budget Game at
http://www.nathannewman.org/nbs/
Budget Simulation
• After trying the Budget Simulation,
describe the results of your budget. This
one page essay is due on Class Session
10.
• Don’t print out the results of your budget
changes, just summarize the changes you
made.