Econ 104 1st Edition Lecture 27 Outline of Last Lecture I Challenges of Monetary Policy II Types of Lags III Great Recession Outline of Current Lecture II Characteristics of Bonds III Government Multiplier IV Fiscal Policy Response to Recession V Fiscal Policy Response to Inflation Current Lecture I II III IV Characteristics of Bonds a Bonds are sold by corporations and governments to the public to finance their operations IOU s b Face Value on a board is what the bond is worth at maturity e g 1 000 c Coupon Payment is an annual interest payment d Bond Holder investor is essentially lending to the government or corporation who sells the bond The Inverse Relation Between Bond Prices and Interest Rates a Consider a discount bond does not pay interest i Matures in 1 year ii Face value is 10 000 iii Purchase price 9524 b If held to maturity the return on the bond i 10 000 9524 9524 X 100 4 Great Recession a When the Federal Reserve began buying LT bonds this pushed up bond prices and pushed down LT interest rates Fiscal Policy a There are two types of Fiscal Policy i Discretionary 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 V VI VII 1 The deliberate use of changes in Federal Taxes and purchases that are intended to stabilize the economy a Meant to increase jobs 2 Recession increase G decrease T 3 Inflationary Situation decrease G increase T a Where G government expenditures and T income taxes ii Non discretionary 1 Automatically kicks in to stabilize output when an economy is contracting or expanding For example a Unemployment compensation b Medicaid c Welfare d Change in tax revenues Government Spending Multiplier a Gov Spending Multiplier Change in equilibrium RGDP Change in G i Fiscal policy multipliers assume the price level is constant Since SRAS is upward sloping a change in equilibrium RGDP will be less than predicted Fiscal Policy Response to Recession a Fiscal Policy Response to Recession Increase G i Suppose Congress votes to increase government expenditures G by 1 000 billion or 1 trillion to restore Y to Y bar 1 How will the change in G of 1 trillion new spending by the government affect the economy a The government spending would create a positive chain of events b Spend money on bridge repair and highway construction leading to newly hired workers which ups the MPC which gives profit to stores which leads to more newly hired works and more consumption b Fiscal Policy Response to Recession Cut Taxes i Suppose that instead that Congress votes to decrease taxes by 1000 billion 1 Tax Multiplier Change in equilibrium RGDP Change in Taxes a Change in equilibrium RGDP will be less than what it is when we increase G because NI does not increase in Round 1 c The increase in G and or the decrease in T and the multiplier effect cause AD to shift right and back to AD1 Fiscal Policy Response to Inflation a Decrease G b Increase Taxes i Tax policy has less of an impact of AD ii The decrease in G and or the increase in T and the multiplier effect cause AD to shift leftward and back to AD1
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