Principles of Macroeconomics Day 5 Dr Andrew L

Principles of Macroeconomics Day 5 Dr. Andrew L. H. Parkes “A Macroeconomic Understanding for use in Business” September 21, 2010 Principles of Macroeconomics, Day 5 卜安吉

http: //krugman. blogs. nytimes. com/2010/09/15/its-demand-stupid/ September 21, 2010 Principles of Macroeconomics, Day 5 2

In this chapter, look for the answers to these questions: n What are the main types of financial institutions in the U. S. economy, and what is their function? n What are three kinds of saving? n What’s the difference between saving and investment? n How does the financial system coordinate saving and investment? n How do gov’t policies affect saving, investment, and the interest rate? September 21, 2010 Principles of Macroeconomics, Day 5 3

Financial Institutions The financial system: the group of institutions that helps match the saving of one person with the investment of another. n Financial markets: institutions through which savers can directly provide funds to borrowers. Examples: n – The Bond Market. A bond is a certificate of indebtedness. – The Stock Market. A stock is a claim to partial ownership in a firm. September 21, 2010 Principles of Macroeconomics, Day 5 4

Financial Institutions n Financial intermediaries: institutions through which savers can indirectly provide funds to borrowers. Examples: – Banks – Mutual funds – institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds September 21, 2010 Principles of Macroeconomics, Day 5 5

Different Kinds of Saving Private saving = The portion of households’ income that is not used for consumption or paying taxes =Y – T – C Public saving = Tax revenue less government spending =T–G September 21, 2010 Principles of Macroeconomics, Day 5 6

National Saving National saving = private saving + public saving = ( Y – T – C) + = ( T – G) Y – C – G = the portion of national income that is not used for consumption or government purchases September 21, 2010 Principles of Macroeconomics, Day 5 7

Saving and Investment Recall the national income accounting identity: Y = C + I + G + NX For now focus on the closed economy case: Y=C+I+G Solve for I: I = Y–C–G national saving = (Y – T – C) + (T – G) Saving = investment in a closed economy September 21, 2010 Principles of Macroeconomics, Day 5 8

Budget Deficits and Surpluses Budget surplus = an excess of tax revenue over govt spending = T–G = public saving Budget deficit = a shortfall of tax revenue from govt spending = G–T = – (public saving) September 21, 2010 Principles of Macroeconomics, Day 5 9

ACTIVE LEARNING A. Calculations 1 n. Suppose GDP equals $11 trillion, consumption equals $7. 3 trillion, the government spends $2. 2 trillion, transfers are zero, and has a budget deficit of $500 billion. n. Find public saving, taxes, private saving, national saving, and investment. September 21, 2010 Principles of Macroeconomics, Day 5 10 10

ACTIVE LEARNING 1 B. How a tax cut affects saving Use the numbers from the preceding exercise, but suppose now that the government cuts taxes by $300 billion. n In each of the following two scenarios, determine what happens to public saving, private saving, national saving, and investment. n 1. Consumers save the full proceeds of the tax cut. 2. Consumers save 1/3 of the tax cut and spend the other 2/3. September 21, 2010 Principles of Macroeconomics, Day 5 11 11

ACTIVE LEARNING 1 C. Discussion questions The two scenarios from this exercise were: 1. Consumers save the full proceeds of the tax cut. 2. Consumers save 1/3 of the tax cut and spend the other 2/3. n. Which of these two scenarios do you think is more realistic? n. Why is this question important? September 21, 2010 Principles of Macroeconomics, Day 5 12 12

SPACE September 21, 2010 Principles of Macroeconomics, Day 5 13

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ACTIVE LEARNING Answers, part A Given: Y = 11. 0, C = 7. 3, 1 G = 2. 2, G – T = 0. 5 Public saving = T – G = – 0. 5 Taxes: T = G – 0. 5 = 1. 7 Private saving = Y – T – C = 11 – 1. 7 – 7. 3 = 2. 0 National saving = Y – C – G = 11 – 7. 3 – 2. 2 = 1. 5 Investment = national saving = 1. 5 September 21, 2010 Principles of Macroeconomics, Day 5 15 15

ACTIVE LEARNING Answers, part B 1 In both scenarios, public saving falls by $300 billion, and the budget deficit rises from $500 billion to $800 billion. 1. If consumers save the full $300 billion, national saving is unchanged, so investment is unchanged. 2. If consumers save $100 billion and spend $200 billion, then national saving and investment each fall by $200 billion. September 21, 2010 Principles of Macroeconomics, Day 5 16 16

Public Policies n Tax Policies – – incentives which increase or decrease the price n Spending Policies – – incentives which increase the amount of money n Spending policies right now are called “Stimulus” Packages by most governments September 21, 2010 Principles of Macroeconomics, Day 5 17

Public Policies n These are very simple generalizations – However they will give you some idea of why the two political parties in America do not agree, and – May help you to understand why the Republican Party is whining so much … September 21, 2010 Principles of Macroeconomics, Day 5 18

Public Policies n In America today, the Conservative or Republican Party (GOP) is in the minority or opposition. – They are against all taxes – For minimal government – justice system mostly, that is to support private property – Pro – Business – usually support most business organizations September 21, 2010 Principles of Macroeconomics, Day 5 19

Public Policies n In America today, the Liberal or Democratic Party is in the majority or in power. – They are against taxes on the middle class – For a regulatory government – helping keep the businesses from dominating consumers – Support business interests yet not big conglomerate multinationals, to some degree September 21, 2010 Principles of Macroeconomics, Day 5 20