Trickle down via tax cuts

Free markets (rational/efficient)

Small govt

**Firms and actors behave rationally**

Recent rends in job growth vs workforce growth

Unemployment rates

Jan '00

Aug '09

4%

9.5%

Ukraine 893%

Peru 839%

Russia 685%

China 560%

Brazil 303%

India 275%

Yd = C+I+G+NX

-As P increases, M (supply of real money) Decreases

-Real rate must increases so that the opportunity cost of holding less real money increases and causes public to be more willing to hold less real-monetary assets and more non-monetary assets.

-As real real increases, firms as less willing to invest in ppe and consumers have more of an incentive to save instead of spend, so I and C both drop

-As real rate increases, demand for home currency increases, which causes the home currency or fx rate to appreciate. This raises the cost of exports, and lowers the cost of imports so NX decreases

***So : C, I and NX all decrease. and so does AD***

When are the following markets in equilibrium?

Asset markets

Nonmoney Asset Market

Goods Market

When all three of these are in equilibrium what state is the economy in?

-Asset Markets : Quantity of real money balances = available supply

-Nonmoney asset market : households and businesses are satisfied with their holdings of non money assets

-Goods Market : Savings = Investment

-General Equilibrium

Changes in Saving/Investment

Government Purchases

Net exports

-New classical says that relative prices matter to determine output(supply)

-Keynsian says that in the SR, the SRAS curve curves up and LRAS curve is straight up

-Fed cuts interest rates to increase AD growth

Year 2 : Supply side growth (AS shifts right 3%) and demand side growth (GSP) 5%

Year 3 : Same growth and AD=AS but inflation is still rising

**Fed can aim for a soft landing by raising rates near end of expansion to soften the inflation**

-Minimize inflation

-Minimize unemployment rate. @ full employment, unemployment rate is approx. 5%

-Maintain that ADgrowth is roughly equal to ASgrowth

In current crisis, the PIMCO report about "new normal" said what about :

-Monetary policy (Fed funds rate)

-Options of buying L/T debt, and effect that buying up L/T debt has on the market

-Although banks will get more reserves, will consumers and firms borrow at low rate?

-Fiscal policy options?

-Fed funs rate @ .15%, cant really drop any lower

-Buying L/T debt makes real rate fall slightly

-Banks are reluctant to lend because, on a net basis, people are paying off debt..Firms need more demand to create supply, but cant sell existing stock

-Obama trying to extend tax cuts for all but top earners, but can we really increase Govt spending(G) with such a giant deficit?

2 Main critics of fed during the current economic crisis regarding : 

-Cost of borrowing

-Arbitrage

-cost of borrowing too low, savers(lenders) gaining too little

-Banks are taking in savings at almost 0% and using for arbitrage opportunities instead of lending

-Consumption 58.3% of gdp (typically 20%)

-Residential Investment (new houses) : 20% (typically 5.5%)

-Inventory Adjustment (21.8%(typically less than 1%)

-Stability agreement limits deficit a country can have

-Greece was buying USD denom debt and trading for Euro denom debt

-Had to have a 110mill euro bailout to meet debt obligation

-Basically bailing out banks from default risk from greece.

-Risk of a stock

-Measured by beta

-Can diversify all systemic risk

American Depository Receipt :  Foreign companies traded on US exchanges in USD

-Would open the investor to international risk

Funds : Interest rates

-Bond : Determines bond prices

y axis - int rate

x axis- Q of loanable funds

How would each of the following affect the loanable funds market?

-Investment Tax Credit

-Increase in expected profitability of capital

-Economic stimulus by govt

-Increase in exports

-Changes in bus cycle (recession/expansion)

-Increased consumer demand

-Would cause an increase in purchase of capital equipment so demand for loanable funds increases

-Would cause demand to increase (is a derived demand of capital demand)

-Causes demand to increase (G increasing)

-Demand increases ( NX increasing)

-Demand decreases in recession, increases in expansion

-Firms expand to meet demand, and demand for loanable funds increases

What affect would the following have on the loanable funds market?

-Increased return on savings

-Increased wealth

The latest census said what about:

-Marriages

-Census gap (between rich and poor)

-Marriages @ all time low. 52% of americans over 18 said they were married in 2009, in 2000, 57.7% were married

-Gap between rich and poor is largest it has ever been. Top 20% earn 49.4% of income. bottom 20% makes 3.4% of all us income

-The income ratio of top vs bottom earners was 2008 was 13.6-1 in 2009 it increased to 14.5-1. Lowest was in 1968 7.69-1

-

-Increases supply of treauries  which drops price and increases yield

-reduces supply in loanable funds market which increases int rates.

-Small (SOE) doesn't influence prices due to changes in their own demand or supply

-Large open econs influence price changes in the market

-Real exchange rate

-Formula

-Includes prices of goods in the exchange rate calculation

- EXr = Ex * P/Pf

-Ex : nom fx rate, with local currency on bottom

-P : Price domestically

-Pf : foreign price in foreign currency