Econ 2133 1st Edition Lecture 4Outline of Last Lecture I. Fisher EquationII. IndexationEND OF PART IOutline of Current Lecture PART II: Government & Fiscal Policy (Role Government plays in America’s Macro Economy)I. Federal BudgetII. What is Fiscal Policy?III. Fiscal Policy ProcessIV. Determinants of Consumption Current LectureA: Role of Conventional Wisdom (what members of congress, journals, and American people think)B: Different points of view that poke holes in conventional wisdom and subjecting it to scrutinyI: Federal Budget:- 3.99$ trillion budget for 2015II: What is Fiscal Policy?Congress and president using taxation and spending policies to attempt to lower the amplitude and periodicity of economic fluctuations and thereby promote economic stability. A: History of our government’s role in economy:- Jeffersonian ideals that government should be limited- However demonstrated rule of law: private property, If I own private property you cannot take it from me (US)- Argentina: taking any account over 500,000$ and replaced with government bonds- US: Has legal system that enforces contracts, defines our society, protects property - Douglas North identified what makes wealthy countries wealthy and poor countries poor, it’s ourrule of laws that govern us not kings or legitimacy from God - People guffawed at people ruling over each other instead of king with divine right ruling over people when US first created as a country of laws- So government does has a legitimate role in correcting market externalities- Eternal debate will always be just how much government is enough - Before great depression, focus on limited government but after it changed completely - The duty of government to intervene in our economic affairs turned around when FDR took office - So now GDP = C + I + G; now it’s government’s duty to intervene- Beginning with Full Employment Act of 1946 (if private sector is insufficient then it’s the government’s duty to increase spending to promote full employment and stop economy from falling)These 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.- Motivator for government intervention was the great depression - Full Employment Act saved US from returning to great depression after WWII- Public Spending comes from private sector via taxation B. Fiscal policy can be both A. Expansionary (mash the gas)B. Contractionary (slam on breaks)C. Example: Greece- Gone through many years of fiscal austerity (stopping of spending and increase of taxes because they were living on borrowed money. 2008 came and they couldn’t borrow any more money from other countries)- Had to downsize their government spending - Now don’t want to pay back all their debt but also want to increase spending again..III: Fiscal Policy ProcessA. Government Spending1. Budget Processa. President Proposes budget firstb. Goes to Congress via appropriations billsc. Appropriations bills get modified and go back to President of United States (POTUS)2. Tax Laws & Tax Percentage Rates a. All tax legislation starts in House Ways & Means Committee (8 are reps, 7 are demos)- Need majority to get legislation out of committee it will just dieb. Goes to Senate Finance Committee (where reps still have majority)c. Tax legislation is passed in both houses then into lawd. Sent to POTUS who will veto it 3. GDP = C + I + GIV: Determinants of consumption1. Current income: return to labor services and assets - + Recreation bet. Income and C- Flow variable: so much $ per unit of time- EX) 400,000/yr; 8/hr2. Wealth “Stock” : sum totally accumulation over time- Flows make stocks go up = “Net Worth”- Assets increase when investing in the compound interest (state matches what you put in until you retire and stop contributing) - Assets (what you own) – liabilities (what you owe) = Net Worth- Put 10% of your income in stocks because to doubles ever 7.5 years- If you take money out before you turn 60 then you not only have to pay an extra 10% on thatmoney but then bumped up to another tax bracket, went 600,000$ to 160,000$ in one day3. Permanent Income/ LDFE Cycle hypothesis - Milton Freidman and Diglioni declared that current consumption at the time depends on lifetime- Dissaving:a. Borrowing (from government, etc)b. Spend Assets (that have been given to