Unit 3 Material Chapters 14 15 16 18 19 These notes are from the PowerPoints from Dr Myoung Lee Negative Income Tax Tax system that collects revenue from high income HHs and gives transfers to low income HHs Exp Taxes Owed 1 3 of income 10 000 A Poverty and Income Distribution Inequality a Poverty b Inequality Bottom part of income distribution below some basic level Entire range of income distribution top to bottom i Market creates according to impersonal forces of what one produces i Developed by Molly Orshansky Social Security Adm In 1964 ii Created by guessing 1 3 of income goes towards food iii Nutritional guide from Dept of Agriculture 1 Definition Cost to buy a basic nutritional diet iv Level of annual income equal to three times the amount of money necessary to purchase the min qty of food required D S c Poverty Line d EXAMPLE Family of Four 2010 Weekly Costs Thrifty 135 60 Low cost 176 60 Moderate cost 221 00 Liberal 268 50 Poverty Rate of the population that is poor according to the Fed s definition SNAP Supplemental nutrition assistance program foodstamps one in six receive foodstamps EXAMPLE OF POVERTY LINE 135 60 thrifty cost for food x 52 total weeks x 3 1 3 21 153 60 We multiply by 3 because if we didn t the total is just the food cost for a year Recall that the poverty line is 1 3 food cost at Thrifty The poverty line is 21 153 60 B Who is Poor a b Now Single Female w Children In 1960 Elderly Poverty rate at 35 90 in 2010 A Criticism of Poverty Line a About 12 of income spent on food i Not adjusted for society become richer Real Gains only inflation b Low cost or Moderate food plan instead of thrifty plan c Money for Clothing shelter technology d Diversity i Rural vs City ii High cost state vs low cost state e Arbitrariness f Cash line only i Ignore in kind benefits 1 Food stamps 2 Housing 3 Heating 4 Phone 5 Free school lunch 6 Daycare 7 Medicaid earn income credit ii iii Omitted from measures of inequality Poverty Biasing them B RADICAL PROPOSALS upward a Instead of money Value proportion of overall income i Exp Median income poverty line is half of the median income b Political flight to redefine to high or low poverty i Republicans against small government c People stfx ca Perfect Distribution of Income Straight line also called the 45 degree line Lorenz Curve Shows the distribution of income by arraying incomes from lowest to highest on the vertical axis and indicating the cumulative fraction of income earned by each fraction of HHs on the horizontal axis aka its impossible to have a perfect distribution with higher incomes less amount and the Lorenz Curve is the line that shows the actual HH distribution Gini Coefficient A A B Refer to the chart Gini Index is A and the white area is B NOTE If it was completely equal the Lorenz curve would be a straight line Likewise if it was completely unequal Area B would be 0 and the Gini Coefficient would be 1 Recall Poverty Bottom part of income distribution below some basic level Recall Inequality Entire range of income distribution from top to bottom eyblog com mymon Smoothing Consumption Lifecycle theory of saving due to a choice w consumer aka if you are above the Living standard you are saving and below you are borrowing I MONEY CAN BE DIVIDED INTO THREE KINDS A Commodity Monies a Gold Silver Cigarettes B Banknotes a Gold Backed C Fiat Money a What we have Federal Reserve Notes Dollah dollah bill yall II GOOD MEDIUM OF EXCHANGE A Verifiable at a low cost Distinguishable real money from counterfeit money Acceptable to most people Standardized quality so that any two units are identical B Portable Able to be carried around easily C Available in sufficient supply No need to barter D Divisible E Durable Able to make change Shouldn t wear excessively purchasing power stable F Have a III ADVANTAGES OF MONEY A Available in convienient denominations easily portable B Can be exchanged for goods and services all times COMPLETELY LIQUID C Fiat Money Fiat in Latin means Let there be no longer backed by gold or any other physical commodity OFFICIAL MEASURES Money in the US economy A M1 transaction money a Currency held by the public i Federal Reserve Notes ii Coins b Checking deposits writing a check i Converted into currency on demand ii Used directly to make payments c Traveler s checks d Other Checkable Deposits B M2 broad money Tax refund checks and other refund checks balances in bank accounts that can be accessed on demand by a M1 All of M1 is included in M2 b Savings deposits c Money Market Mutual Funds d Money Market Deposit Accounts MMDAs e Small Time Deposit accounts CD of under 100 000 M1 MONEY STOCK A F R E D Federal Reserve Economic Data B The Velocity of Money V Speed at which the typical dollar bill travels around the economy from wallet to wallet a M x V NGDP i M is the quantity of money b WHAT ABOUT CREDIT CARDS Not money It is an ID that allows an instant loan Not a means of payment but a means of deferring payment Enables the holder to obtain a loan quickly but the loan must be repaid with money Credit Cards DO change consumer behavior Federal Reserve System The Fed s US Central Bank The Fed Created in 1913 by the Federal Reserve Act and is technically a corporation owned by federally chartered banks Quasi Public Public appointees and independence Made after a severe amount of bank failures to ensure the health of the nation s banking system The response to the bank failures at the onset of the Great Depression Congress established the Federal Deposit Insurance Corporation FDIC in 1934 Insures up to 250 000 in deposited money Three Primary Functions 1 Oversee the banking system to maintain its integrity a Regulates banks to promote safe and sound banking practices 2 Acts as a banker s bank a Member banks deposit Fed b Serve as a Lender of Last Resort i Supplies loans to financially sound banks that experience a Liquidity crisis B c banks Borrow short lend long their assets are illiquid but their liabilities are very liquid leads to Bank Panic if many banks experience a bank run ii Bank Run IMPORTANT Moral Hazard Fed regulates member banks 3 Conducts MONETARY POLICY by controlling the qty of money money supply Four more functions not as important 4 Distribute and update coins and currency 5 Physically moving checks 6 Sell treasury bonds process gov t payment 7 Regulate consumer credit Know this in a list will be a multiple choice question Federal Reserve System Cont Money Supply M Qty of money available to