A FEW ECON IDEAS: FISCAL POLICY & MORE Aug 2016

Quick Recap #1 Definition of ‘ Investment ’ Plants, capital equipment, machinery, etc. that provide the basis for future production) GDP Of the 3 approaches to calculate GDP that we studied earlier (the expenditure approach, the income approach, and the value-added approach), which is the most common? Expenditure approach (GDP = C + I + G + Xn) Does the expenditure approach measure salaries as part of GDP? Mostly no. Salaries (except for government employees) are not counted.

Quick Recap #2

Why can SRAS be further right than LRAS? A: Resources can be used more intensively in the short run at a rate beyond what is sustainable One example…

HOW CAN INTEREST RATES AFFECT INVESTMENT DEMAND/SPENDING? Direct or inverse relationship?

Of the first 3 components of GDP, which is the most volatile? Why?

Factors in Variability of Investment Durability of capital goods Do you replace or do you patch them up? (What about your Econ textbooks?!) Irregularity of innovation How often does something like electricity or the Internet come along? Variability of profits Profits are highly variable Variability of expectations Expectations change because of exchange rate fluctuations, congressional action, stock performance, etc.

THE INVESTMENT DEMAND CURVE Direct or inverse relationship?

3 ways governments can bring in $$$ (revenue) WHICH ONE BRINGS IN (BY FAR) THE MOST? TAXES (DIRECT & INDIRECT) THE SALE OF GOODS AND SERVICES THE SALE OF STATE-OWNED (GOVERNMENT OWNED) ENTERPRISES Definition/examples of each?

NOW…FOR A NEW CURVE “The Laffer Curve is a representation of the relationship between possible rates of taxation and the resulting levels of government revenue.” (Wikipedia)

Laffer Curve – Basic

Another The Laffer Curve

FYI: US Top Marginal Tax Rates

Average US Tax Rates

2015 US Income Tax Rates From

2009 Effective Tax Rates, Selected Countries

Types of Taxes

Capital Gains Taxes *What are they? *Why do low rates tend to help the wealthy?*

China & Taxes Corporate Tax 25% Capital Gains: 20%

NOW THAT WE’VE LOOKED AT DIFFERENT TYPES OF GOVERNMENT REVENUE (TAXES), LET’S TAKE A LOOK AT DIFFERENT TYPES OF GOVERNMENT SPENDING!

3 ways governments can spend their $$$ WHICH TWO COUNT TOWARD GDP? CURRENT EXPENDITURES CAPITAL EXPENDITURES TRANSFER PAYMENTS

3 ways governments can spend their $$$ CURRENT EXPENDITURES Current spending, which is expenditure on wages and raw materials. Current spending is short term and has to be renewed each year. CAPITAL EXPENDITURES Capital spending, which is spending on physical assets like roads, bridges, hospital buildings and equipment. Capital spending is long term as it does not have to be renewed each year - it is also called spending on ‘social capital’. From

PAUSE… The rest of this PPT is about Money Markets & Liquidity, the Fractional Reserve Banking System, and the Money Multiplier (related to Monetary Policy)

RELATED MONETARY TERMS MONEY MARKET SHORT TERM ONE YEAR OR LESS HIGHLY LIQUID Less liquid than saving accounts, more liquid than bonds LIQUIDITY “The ability to convert an asset to cash quickly” (Investopedia)

Fractional Reserve Banking System

Fractional Reserve Banking and the Money Multiplier

IN REALITY, BANKS OPERATE ON A ‘LOANS FIRST’ BASIS INSTEAD OF A ‘RESERVES FIRST’ BASIS If they see a good loan opportunity, they will make it and then find the money from another bank or elsewhere. atever-became-of-the-money-multiplier/

Money Multiplier Not Always Dependent on Reserve Ratio