Tax Rate increase can either increase or decrease tax revenue
Is the goal of the taxes to maximize tax revues?
Tuesday April 8th
Y = C + I + G + X
Government Spending to change Y
Not sustainable
Not LR wealth creating
may lead to LR trouble
surpluses
deficits
laffer curve
Thursday April 10th
**More supply side proposals**
Lower income tax rates
Lower corporate profit taxes
Tax credits for research and development
Educational Subsidies
What constitutes money:
Medium of exchange
Unit of account
Store of value
Batter system
Double coincidence of wants
Types of money
Commodity money
Problems: transportation costs and inherent price risks
Commodity backed money
Fiat money
Money Supply
M1
M2
Credit cards are not in the money supply they are short term loans
Commercial Banks
Middle men in loans
Channel from which money supply policy is conducted
T Account
Banks reserves
No interest
Required reserves (RR)
Required Reserves Ration (rr)
Excess Reserves (ER = R – RR)
Multiplier effect
Tuesday April 15th
M = C + D
Fractional reserves
Money multiplier (m = 1/rr)
The Fed
Monetary Policy
Regulate banks
rr
Lender of Last Resort
Bank for commercial banks
Federal funds
Tools:
Discount loans
Discount window
Discount rate
Imprecise
Unpredictable
rr
OMO
Selling off assets to change M
Y = C + I + G + X
SRAS system
Monetery Poliy has real effects in the SR (only).
Thursday April 17th
Does the fed change the money supply or interest rates?
The fed targets interest rates by controlling the money supply
The fed funds rates are set by market forces
How does the Fed react to changes in unemployment? Interest rates?
Increase in M à Increase in Supply of Loans à decrease in interest rates and an increase in quantity loans demanded à increase in investment and à Increase in AD
Increase in M à increase in C à Increase in AD
Effect (SRAS Model):
Interest rate lower
Partial price adjustment
Y>Y*
uReal wages lower
LR effect—only price levels (not relative prices)
Inflation is a monetary phenomenon
Tuesday April 22nd
Real errors aren’t predictable
The Fisher Effect
Why do countries with high inflation have high interest rates?
Time path for interest rates due to a monetary policy
Initial surprise?
What if the monetary policy is expected?
Why is inflation a problem?
Inflation is a monetary phenomenon
So why does the government increase M?
“monetize” debt
Stimulate the economy
Does M have any real effects?
SR
LR
Unexpected
Expected
Prior belief: inflation always stimulates the economy
No inflation expectations
Adaptive expectations
Implications
Inflation isn’t always a surprise
To have positive real effects inflation must accelerate
Decelerating inflation has negative real effects
Expectations are a step behind
Errors are systematic
Systematic mistakes can be exploited
Thursday April 24th
So how do people form inflation expectations?
No inflation expectations
Adaptive expectations
Rational expectations
Real errors aren’t predictable
Phillips Curve
**The problem with the underlying assumption to the model: People’s expectations will not adjust over time
Friedman’s critique: adaptive expectations
Friedman:
Introduced u*
No surprise à u=u*
There is an inflation/unemployment tradeoff if actual inflation > expected inflation
