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USC ECON 205 - Consumption and Taxation

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ECON 205 2nd Edition Lecture 6Outline of Last Lecture Macroeconomic policiesA. Monetary policy – the Federal Reserve board (Fed)B. Fiscal policy– taxes, expenditures and subsidies – the AdministrationC. Market policy–market structureD. International policy—currency regulationII. MaximizationIII. Economic Growth of GDPIV. Price StabilityV. Aggregations to understand national output.VI. Gross Domestic ProductVII. The problem of averagesI. VIII. Price IndicesOutline of Current LectureI. Answer key given to previous testII. Consumption functionIII. Marginal propensityIV. Federal policy and taxationCurrent LectureII. 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 propensityMarginal propensity to consume is percent of income used on consumption. For instance, if themarginal 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 taxationProgressive taxation is the tax model used by the United States government; one’s tax rate goesup 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 MarxThe 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 Fedwas 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


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