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

2. September 21, 2010Principles of Macroeconomics, Day 52 http://krugman.blogs.nytimes.com/2010/09/15/its-demand-stupid/

3. September 21, 2010Principles of Macroeconomics, Day 53 In this chapter, look for the answers to these questions: What are the main types of financial institutions in the U.S. economy, and what is their function? What are the main types of financial institutions in the U.S. economy, and what is their function? What are the three kinds of saving? What are the three kinds of saving? What’s the difference between saving and investment? What’s the difference between saving and investment? How does the financial system coordinate saving and investment? How does the financial system coordinate saving and investment? How do gov’t policies affect saving, investment, and the interest rate? How do gov’t policies affect saving, investment, and the interest rate?

4. September 21, 2010Principles of Macroeconomics, Day 54 Financial Institutions The financial system: the group of institutions that helps match the saving of one person with the investment of another. The financial system: the group of institutions that helps match the saving of one person with the investment of another. Financial markets: institutions through which savers can directly provide funds to borrowers. Examples: Financial markets: institutions through which savers can directly provide funds to borrowers. Examples: –The Bond Market. A bond is a certificate of indebtedness. –The Stock Market. A stock is a claim to partial ownership in a firm.

5. September 21, 2010Principles of Macroeconomics, Day 55 Financial Institutions Financial intermediaries: institutions through which savers can indirectly provide funds to borrowers. Examples: 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

6. September 21, 2010Principles of Macroeconomics, Day 56 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

7. September 21, 2010Principles of Macroeconomics, Day 57 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

8. September 21, 2010Principles of Macroeconomics, Day 58 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 = (Y – T – C) + (T – G) Saving = investment in a closed economy national saving

9. September 21, 2010Principles of Macroeconomics, Day 59 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)

10. September 21, 2010Principles of Macroeconomics, Day 510 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. 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. Find public saving, taxes, private saving, national saving, and investment. Find public saving, taxes, private saving, national saving, and investment. A C T I V E L E A R N I N G 1 A. Calculations 10

11. September 21, 2010Principles of Macroeconomics, Day 511 Use the numbers from the preceding exercise, but suppose now that the government cuts taxes by $300 billion. Use the numbers from the preceding exercise, but suppose now that the government cuts taxes by $300 billion. In each of the following two scenarios, determine what happens to public saving, private saving, national saving, and investment. In each of the following two scenarios, determine what happens to public saving, private saving, national saving, and investment. 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. A C T I V E L E A R N I N G 1 B. How a tax cut affects saving 11

12. September 21, 2010Principles of Macroeconomics, Day 512 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. Which of these two scenarios do you think is more realistic? Which of these two scenarios do you think is more realistic? Why is this question important? Why is this question important? A C T I V E L E A R N I N G 1 C. Discussion questions 12

13. September 21, 2010Principles of Macroeconomics, Day 513 SPACE

14. September 21, 2010Principles of Macroeconomics, Day 514

15. September 21, 2010Principles of Macroeconomics, Day 515 Given: Y = 11.0, C = 7.3, 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 A C T I V E L E A R N I N G 1 Answers, part A 15

16. September 21, 2010Principles of Macroeconomics, Day 516 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. A C T I V E L E A R N I N G 1 Answers, part B 16

17. September 21, 2010Principles of Macroeconomics, Day 517 Public Policies Tax Policies – Tax Policies – –incentives which increase or decrease the price Spending Policies – Spending Policies – –incentives which increase the amount of money –incentives which increase the amount of money Spending policies right now are called “Stimulus” Packages by most governments Spending policies right now are called “Stimulus” Packages by most governments

18. September 21, 2010Principles of Macroeconomics, Day 518 Public Policies These are very simple generalizations 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 …

19. September 21, 2010Principles of Macroeconomics, Day 519 Public Policies In America today, the Conservative or Republican Party (GOP) is in the minority or opposition. 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

20. September 21, 2010Principles of Macroeconomics, Day 520 Public Policies In America today, the Liberal or Democratic Party is in the majority or in power. 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