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Economics for Business and

Management

Week 12

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Review

Name 3 macroeconomic goals

What are some problems associated with

calculating GDP?

Who is included in the labor force? Who is not

included?

What are the four types of unemployment?

What is inflation?

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Review

What is the difference between GDP and GNP?

What makes calculating unemployment

difficult?

What is a business cycle?

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Review

What is AD?

Why is AD downward sloping?

What causes shifts in AD?

What is AS?

Why is AS upward sloping?

What causes changes in long run potential AS? What ONLY shifts short run AS?

What is the macroeconomic equilibrium?

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Assignment #6 Q1

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Assignment #6 Q2

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Review

What is a recessionary gap?

What is an inflationary gap?

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Assignment #6 Q3&Q4

4. Using the AD/AS model, draw the economywhen it is experiencing a recessionary gap

(recession). Remember to label the axis and any

lines you may draw.5. Using the AD/AS model, draw the economy

when it is experiencing an inflationary gap

(inflation). Remember to label the axis and anylines you may draw.

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Course Project Reminder

Final Paper 5% of course due July 23

(TODAY)

Via digital dropbox ONLY

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Schedule

WEEK CLASS DATE TOPICS COVERED

10 9-Jul Chapters 8&9

11 16-Jul Chapter 10/ Quiz #2

12 23-Jul Chapter 11&12

13 30-Jul Chapters 12&13/ Quiz #314 6-Aug Chapter 14 / Review

15 August 12-17 Finals week

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Chapter 11

Automatic Stabilizers

Multiplier Effect

Budget Surplus and Deficits

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What are Automatic Stabilizers?

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Automatic Stabilizers

Automatic stabilizers are built-in measuressuch as taxes and transfer payments to lessenthe effects of the business cycle.

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Automatic Stabilizers

During a recessionary period:

The government earns less revenue

Pays more EI and Welfare

During an expansionary period:

The government earns more tax revenue

Fewer people demand EI or welfare

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What is the multiplier effect?

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The Multiplier Effect

The multiplier effect is the magnified impact

of a spending change on AD.

An initial spending change produces income and

part of this new income becomes new spending.

This process is repeated with each spending round

smaller than the last.

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The Multiplier Effect

Determined by the marginal propensity to

consume (MPC)

The larger the MPC, the larger the multiplier

effect.

What is MPC?

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MPC

Marginal propensity to consume (MPC) is the

fraction of additional disposable income that a

household consumes rather than saves.

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The Multiplier Effect

We can calculate the multiplier and find the

total impact of an initial change by:

multiplier = 1/(1-MPC)

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Ex. Multiplier

Every $1 in government spending results in

$.67 in consumer spending (MPC = .67)

Multiplier = 1/(1-MPC)

Multiplier = 1/(1-.67) = 1/.33 = 3 ~

Meaning: If government spending increased by $100million it would result in a total increase in spending

of $300 million (the initial $100 million resulted in an

additional $200 million in consumer spending)

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The Multiplier Effect

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The Multiplier

The Federal government spends $2 billion to

construct new highways, what would be the

resulting change in AD?

If MPC were 1/3

If MPC were 1/2

If MPC were 2/3

Multiplier = 1/(1-MPC)

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The Multiplier

The Federal government buys $2 billion worth of oil what

would be the resulting change in AD?

If MPC were 1/3

Multiplier = 1/(1- 1/3) = 1.5Change in AD = 2 billion * 1.5 = 3 billion

Increase in consumption = 3 billion 2 billion = 1 billion

If MPC were If MPC were 2/3

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Practice

T/F When the govt increases spending, the

ultimate increase in total purchases (AD) will

be greater than the initial increase.

T/F The multiplier is smaller when the MPC is

smaller.

T/F The multiplier process is instantaneous

T/F Savings and money spent on imports

reduce the size of the multiplier.

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What are Stabilization Policies?

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Stabilization Policies

Stabilization policy is government policy

designed to lessen the effects of the business

cycle.

Can be expansionary or contractionary.

Expansionary policy attempts to reduce unemployment

and stimulate output.

Contractionary policy attempt to stabilize prices and

reduce output.

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Stabilization Policies

Govt can use fiscal or monetary policy.

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Monetary Policy

Government manipulation of the available

money supply within the economy.

Money Supply

Interest Rates

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Fiscal Policy

The use of government spending and/or taxes

to alter AD

/G (

GovtSpending)

/ T (Taxes)

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Fiscal Policy

Fiscal Stimulus

Fiscal Austerity

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Fiscal Policy

Fiscal Stimulus G (Govt Spending)

T (Taxes)

(Keynesian Economics)

Fiscal Austerity G (Govt Spending)

T (Taxes)

Federal deficits

Why would a government follow these

policies?

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Benefits/Drawbacks of Fiscal

Policy?

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Benefits of Fiscal Policy

Regional focus target affected areas

Straight-forward impact on output

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Difficulty with Fiscal Policy

Delays time lags

Political visibility

Public debt

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Political visibility

Politicians must consider voters when making

decisions:

Taxes

Spending

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Practice

What are automatic stabilizers?

What is the multiplier effect?

What is MPC?

What is good about fiscal policy?

What makes fiscal policy difficult?

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Government Revenue

How does the Govt make money?

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What if the Govt spends more

than its revenue?

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Budget Deficit

When government spending exceeds tax

revenues for a given fiscal year.

NOT the same as the TRADE DEFICIT

The opposite is a budget surplus: When

revenues are greater than spending

Does Canada have a budget deficit or surplus?

How much?

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Budget Deficits

2013 Budget of the Canadian FederalGovernment:

Total Revenue C$263.9 billion

Total Expenditures C$282.6 billion

Resulting in C$18.7 billion deficit

http://www.theglobeandmail.com/news/politics/budget/infographic-the-visual-

summary-of-the-2013-budget/article10012488/

http://www.theglobeandmail.com/news/politics/budget/infographic-the-visual-summary-of-the-2013-budget/article10012488/http://www.theglobeandmail.com/news/politics/budget/infographic-the-visual-summary-of-the-2013-budget/article10012488/http://www.theglobeandmail.com/news/politics/budget/infographic-the-visual-summary-of-the-2013-budget/article10012488/http://www.theglobeandmail.com/news/politics/budget/infographic-the-visual-summary-of-the-2013-budget/article10012488/http://www.theglobeandmail.com/news/politics/budget/infographic-the-visual-summary-of-the-2013-budget/article10012488/http://www.theglobeandmail.com/news/politics/budget/infographic-the-visual-summary-of-the-2013-budget/article10012488/http://www.theglobeandmail.com/news/politics/budget/infographic-the-visual-summary-of-the-2013-budget/article10012488/http://www.theglobeandmail.com/news/politics/budget/infographic-the-visual-summary-of-the-2013-budget/article10012488/http://www.theglobeandmail.com/news/politics/budget/infographic-the-visual-summary-of-the-2013-budget/article10012488/http://www.theglobeandmail.com/news/politics/budget/infographic-the-visual-summary-of-the-2013-budget/article10012488/http://www.theglobeandmail.com/news/politics/budget/infographic-the-visual-summary-of-the-2013-budget/article10012488/http://www.theglobeandmail.com/news/politics/budget/infographic-the-visual-summary-of-the-2013-budget/article10012488/http://www.theglobeandmail.com/news/politics/budget/infographic-the-visual-summary-of-the-2013-budget/article10012488/http://www.theglobeandmail.com/news/politics/budget/infographic-the-visual-summary-of-the-2013-budget/article10012488/http://www.theglobeandmail.com/news/politics/budget/infographic-the-visual-summary-of-the-2013-budget/article10012488/http://www.theglobeandmail.com/news/politics/budget/infographic-the-visual-summary-of-the-2013-budget/article10012488/http://www.theglobeandmail.com/news/politics/budget/infographic-the-visual-summary-of-the-2013-budget/article10012488/http://www.theglobeandmail.com/news/politics/budget/infographic-the-visual-summary-of-the-2013-budget/article10012488/

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Why Have a Deficit?

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The Federal Government Debt

Budget Deficits

Due to a weaker economy and increases in

government spending on priority areas such ashealth, education, transport and defence.

Provide the government with the flexibility to

respond to changing economic circumstances.

May run deficits in response to:

War

natural disaster

economic downturn

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The Federal Government Debt

Financing a Budget Deficit

The budget deficit is financed by issuing debt.

The federal government issues bonds

What is Canadas debt?

http://www.debtclock.ca/

What country has the most debt?http://www.economist.com/content/global_debt_clock

http://www.debtclock.ca/http://www.usdebtclock.org/http://www.economist.com/content/global_debt_clockhttp://www.economist.com/content/global_debt_clockhttp://www.usdebtclock.org/http://www.debtclock.ca/

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Debt to GDP ratio

Italy 119.7%

Greece 157%

U.S. 105.6%

Canada 81%

India 67.5%

China 15%Brazil 63.8%

Debt figures are derived from national definitions and therefore may vary from

country to country.

http://online.wsj.com/article/SB10001424052748703789104576272891515344726.html

http://online.wsj.com/article/SB10001424052748703789104576272891515344726.htmlhttp://online.wsj.com/article/SB10001424052748703789104576272891515344726.htmlhttp://online.wsj.com/article/SB10001424052748703789104576272891515344726.htmlhttp://online.wsj.com/article/SB10001424052748703789104576272891515344726.htmlhttp://online.wsj.com/article/SB10001424052748703789104576272891515344726.html

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The Federal Government Debt

Budget Surpluses

Policymakers must decide what to do with a

surplus: Pay down the government debt

Cut taxes

Use for improvements in education, health

care, and R&D, leading to greater economic

growth

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The Federal Government Debt

Government Debt

Is debt ok?

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Debt

In a recession, tax revenues fall, and money is

needed for social programs (EI)

BUT deficits during hard times should be

balanced by surpluses during good times.

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Debt

How much debt is too much?

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Debt

It depends

Can the government pay off its debt in the future?

Developed countries can sustain higher levels of

debt.

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Debt

If debt is too large:

Default

Austerity

Why do countries/people continue to hold USdebt?

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European Economic Problems

Greece

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Greece Problem

National debt - 300 billion ($413.6 billion)

Debt is 141% of GDP (2010)

Unemployment 18.4% (youth rate 43.5%)

Solution

50% write-down of debt (53.5% reduction) 110 billion bailout (2010)

130 billion bailout (2012)

Cut spending by 1.5% of GDP, cut minimum wage and

holiday bonuses, tax increases

The goal to cut the Greek government's debt from 160% of GDP to

120% of GDP by 2020.

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Italy

Problem

National Debt 1.927 trillion

Debt is 121% of GDP

Average annual growth (15yrs) - 0.75%

Interest on debt (2.7% - short term, 6%+ LR)

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Italy (ECB/Germanys Concerns)

bailing out Italy will simply encourages

reckless spending

printing money will stoke inflation

if Italy failed to repay the rescue loans, it couldleave the ECB itself in need of a bailout, and

that could destroy its independence.

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Practice

T/F The government can use fiscal policy tostimulate the economy out of a recession.

T/F When tax revenues are greater than

government spending a deficit exists. T/F An increase in taxes would stimulate the

economy.

T/F Sometimes fiscal policy can destabilize theeconomy

T/F Time lags are a problem in the

implementation of fiscal policy.

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Practice

Budget surpluses exist when:a. government spending exceeds its tax revenues.

b. government tax revenues exceed its spending.

c. government spending equals its tax revenues.

When taxes are increased, disposable income ____, and

hence consumption ____.

Fiscal policy refers to the government manipulation of what?During a recession, government transfer payments

automatically ____ and tax revenue automatically ____.

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Practice

What is a contractionary gap?

What action can the govt take to correct this gap?

What is an expansionary gap?

What action can the govt take to correct this gap?

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Assignment #6 Q5&Q6

5. What is aggregate demand? What are the

two reasons the aggregate demand curve is

downward sloping?

6.Compare/Contrast the advantages and

disadvantages of Monetary and Fiscal policy?

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Chapter 12

Functions of Money

Demand and supply for money

Money multiplier

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What are the functions of money?

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The Functions of Money

There are three main functions that money

performs:

a means of exchange

a measure of value

a store of purchasing power

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Functions of Money

1. Medium of Exchange

The primary function of money.

To facilitate transactions and lower transaction

costs.

Alternative to barter the direct exchange of

goods and services without the use of money.

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Functions of Money

2. Measure of Value

Common ruler" for comparing the values of

diverse goods and services.

Lowers information costs of making

transactions.

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Functions of Money

3. Store of Purchasing Power

A means of efficiently saving things of value.

Money is cheaper and easier to store than

other goods.

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Facebook Credits

10 cents/credit

Buy premium content inside games and

applications

Could a gigantic nonsovereign like Facebook

someday launch a real currency to compete

with the dollar, euro, yen, and the like?

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Facebook Credits

Measure of Value? YesCredits offer a system-wide pricing scheme for

app vendors across countries

Store of Value? No

Cant convert into something else of value (gold)

Medium of Exchange? No

Microsoft wont accept them

Facebook banned the use of Credits as

payment for tangible goods