Econ 104 1st Edition Lecture 27Outline 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 InflationCurrent LectureI. 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. $1,000c. Coupon Payment: is an annual interest payment d. Bond Holder: (investor) is essentially lending to the government or corporation who sells the bond II. 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 $10,000iii. Purchase price: $9524b. If held to maturity, the return on the bond i. ($10,000-$9524)/$9524 X 100 = 4%III. Great Recession a. When the Federal Reserve began buying LT bonds, this pushed up bond prices and pushed down LT interest ratesIV. 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.1. The deliberate use of changes in Federal Taxes and purchases that are intended to stabilize the economya. Meant to increase jobs 2. Recession: increase G, decrease T 3. Inflationary Situation: decrease G, increase Ta. 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 V. 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 VI. Fiscal Policy Response to Recessiona. 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 VII. Fiscal Policy Response to Inflation a. Decrease Gb. Increase Taxes i. Tax policy has less of an impact of ADii. The decrease in G and or the increase in T, and the multiplier effect cause AD to shift leftward and back to
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