Econ 102 1st Edition Lecture 24Outline of Last Lecture I. Exam 3II. Chapter 15Outline of Current LectureI. Chapter 15 (cont.)II. Review Fiscal PolicyCurrent LectureI. Chapter 15 (cont.)a. Tipsi. Look at the graphs on Learn@UW!ii. Eudey also posted an audio clip explaining itb. 15.3 Understanding the Economics of the Adjustment Processi. Chapter 15 all Keynesianii. Figure 15.4 very important1. In summary, graphs lands us back where we have startediii. Why changes in wages and prices restore the econ-omy to full employment1. changes in wages and prices change the demand for money2. This changes the interest rates, which then affect ag-gregate demand for goods and services and ulti-mately GDPiv. Long Run Neutrality of MoneyThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.1. Monetary Policy in the Short Run and the Long Run2. Study graphs in power points! 3. if it works great, may be like pushing on a stringv. Crowding Out In the Long Run1. Keynesians dont worry about the pushing on a string,they believe it will workvi. Application 31. Increasing Health Care Expenditures2. were are spending a lot more on surgeries, appoint-ments, etc3. The opportunity cost is saving..a. less capital deepening b. shifting the components of Aggregate Demandc. Spending more on health care and less on other thingsvii. Say’s Law1. Classical Beliefsa. Aggregate demand never just shifts on its owni. It changes because real wages change and our ability to spend has changed firstb. supply creates its own demand not the other way aroundc. Supply falls, demand will fallII.Review Fiscal Policya. Fiscal Policy Legacies from the Great Recessioni. a lot of spending (unemployment, bank rescues, welfare, rescued AIG and some other firms)ii. continued the (temporary) Bush tax cuts of 2001iii. left with an enormous debt relative to GDP (raise taxes back to pre-Bush levels and or cut spending- Where?Social Security? Education? Maintenance of roads? not a lot of unimportant things…)iv.our debt would go away if we went back to pre-Bush Tax levels but there is a lot of unwillingness to do thatb. Monetary Policy legacy from the Great Recessioni. Expansionary open market operations to target federal funds rate near zero (as low as can go)ii. Direct Lending in mortgage back securities and to some banks and firms (get all interest rates low)iii. cut the discount rate (lending rate to banks)iv.Concern that these policies may have put us in a liquidity trap ( cant use policy if another disaster strikes)v. Concern about inflation from the increase in the money supply (didn’t happen- lucked out there)c. We will review on
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