ECON 205 2nd Edition Lecture 6 Outline of Last Lecture Macroeconomic policies A Monetary policy the Federal Reserve board Fed B Fiscal policy taxes expenditures and subsidies the Administration C Market policy market structure D International policy currency regulation II Maximization III Economic Growth of GDP IV Price Stability V Aggregations to understand national output VI Gross Domestic Product VII The problem of averages I VIII Price Indices Outline of Current Lecture I Answer key given to previous test II Consumption function III Marginal propensity IV Federal policy and taxation Current Lecture II Consumption Function GDP C I G X i Gross domestic product is composed of consumption C investment I government expenditures G and net exports X total exports minus total imports Consumption is a stable percent of the GDP and the consumption function is the relationship between consumption and income The Y axis of the graph measures consumptions while the X axis measures income III Marginal propensity Marginal propensity to consume is percent of income used on consumption For instance if the marginal propensity to consume MPC equals 0 8 that means that for every dollar of income earned eighty cents eighty percent of a dollar is spent on consumption With income you either consume it or save it Therefore income is equal to consumption plus savings Savings goes into investment which is still part of GDP If all savings go into investment savings is equal to investment However sometimes savings is less than investment equal to investment or greater than investment Poor people have a higher marginal propensity to consume Rich people tend to put a higher percentage of their income into savings IV Federal policy and taxation Progressive taxation is the tax model used by the United States government one s tax rate goes up according to one s income level i e rich pay a higher percentage poor a smaller percentage The logic for progressive taxation is that in theory taxing the rich and giving to the poor will stimulate the economy Progressive taxation first proposed by Karl Marx The Federal Reserve the Fed revises and structures the government s monetary policy on a weekly basis The Fed can change the monetary indicators without Congress s approval The Fed was originally created to determine the US s monetary policy by studying European countries Monetary policy versus fiscal policy The Federal Reserve Board meets decides and announces monetary policy Compared to fiscal policy which requires a bill sent to Congress to change tax rates etc it is very efficient The Fed is relatively autonomous from the government unlike fiscal policy that is decided by the government itself
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