Economics 110

2-5-07Homework – Negative income taxPermanent income hypothesis – expenditure is based upon permanent income1776 – Wealth of NationsFriedman pushed for school vouchersMonetary policy – the use of Federal Reserve tools to manipulate the economyFiscal policy – the use of government spending and taxation to manipulate the economyDeficit – spend more than you take inRecession – a downward trend in the business cycle where income, output, and employment are decreasing.Business Cycle – a period non-recurrent fluctuation in the economyGDP – the total market value of all final goods and services produced in an economy in a given year.GNP – the total market value of all final goods and services produced by an economy in a given year.2001 and 2003 – Bush tax cutsMilton Friedman wanted a constant money supply rule – he wanted it should grow 3.5% every year for stability – no more guessing what the Fed will do – 3.5% matches GDP growth – you could no longer use discretionary monetary policyAsset – something you own that has valueLiability – something for which you are responsibly to payAssets minus liabilities = net worthNegative net worth = insolventC&C = coins and currencyReserves at the Federal Reserve – self explanatoryGovernment Securities T-bill – usually 3-12 monthT-Note – 1-10 yearsT-Bond – above ten yearsNational Debt is in the 8 trillion dollar rangeDemand Deposits – Checking accountsSavings Deposits – savings accountTime Deposits – for a certain length at least – CD’s (certificate of Deposit)Correct terms on reserve –

Legal (or actual) reserves – C&C + reserves at the FedRequired reserve – a percentage of the T,D, and S depositsExcess = legal reserves – required reservesM1 – most liquid form of money supply

C&C (20% of the money supply) DD (70%) Traveler’s Checks (less than 1%)

2-2-07Target is $20,00050% negative income taxYou just made $14,000 - $3,000Flat tax – a proportional tax – the percentage tax stays the same as the base increasesProgressive – our current systemJFK – 1961 – 91% was the highest marginal tax rateReagan – 1980 – highest was 70% down to 28%Homework – CPI for Germany, Yugoslavia, Hungary CPIMilton Friedman – “Inflation is always and everywhere a monetary phenomenon.”You can’t have inflation without manipulating the money supplyThree tools of the Fed in a Recession

Open Market Operations – buying and selling of Gov. Sec. (most used) Change the Reserve requirement (rarely used) Change the discount rate (fairly often)

Discount rate – the interest rate that the Fed charges Financial institutionsThe Fed is very independentTechnically and legally the Fed is a private corporationHow does the Fed make money? (It makes a bunch.)Homework – what is the Chairman of the Fed’s salary?Economics – the science of allocating scarce resources with alternate uses so as to minimize the wants of society.Opportunity cost – the cost of what you forgo by choosing something elseSunk cost – something you have paid and can’t get backMarginal – additional – slope of the total function – first derivative in calculusDiminishing terms to studying

Germany – July 1922 = 1January 1924 (18 months later) = 750,000,000,000

Yugoslavia – January 1993 = 1January 1994 = 600,000,000,000,000

Hungary – June 1945 = 1June 1946 = 828,000,000,000,000,000,000,000,000

2-9-07Positive economics – descriptive (what is)Normative Economics – the way it should be (value judgment)

Microeconomics – one business, industry, market, personMacroeconomics – deals with the whole economy GNP – The value of all final goods and services produced by an economy.Utility – satisfactionFactors of production – things that are needed in order to produce

Land (natural resources) Labor (personnel) Capital (plant and equipment) Entrepreneurship (risk taker)

Economic returns to the factors of production Labor – wages Land – rent Capital – interest Entrepreneur – profit

Unintended effectsHomework – make a demand curve for reckless drivingCeteris paribus – all other things constantAll other things being equalIn economics “y” stands for incomeWill use infinityWith a forty-five degree line both values are the same if the scaling is the sameHomework – read chapter 2

2-12-07PPF – all the possible combinations of two goods that can be produced with a certain set of resourcesA PPF with constant opportunity cost is a straight lineA concave PPF shows increasing opportunity costsUnder the PPF is a point with unemployed resourcesIndifference curve – any point on an indifference curve give you the same amount of utility/satisfactionUtils – measurement of satisfactionLaw of diminishing marginal utility – you get less utility for each marginal additionWith each successive unit of a product you consume you will get less and less additional satisfaction.Rational Man – we are making rational decisions Mercantilism – to drain resources from a colony and bring it back to the mother country, goldAdam SmithAbsolute advantage – with a given set of resources I can outproduce youZero Sum game – a complete balance between trade partnersPositive sum game – both sides gainComparative advantage – produce where you have the greatest advantage or the least disadvantage.One country cannot have a comparative advantage in both goodsIN general economists like free trade

People like trade when you have a level playing fieldThe farmer in the US is being subsidizedThe Great Depression = BADThe reason why is that most countries were putting on tariffs and quotasDumping – international dumping is when you sell a product in another country at a lower price than what you sell it for in your home country – used in order to put international competition out of businessHomework: send your parents a valentine

2-14-07Demand – the amount of good people are willing and able to purchase at various possible prices within a given time.Law of Demand – Price varies inversely with quantity demanded.A change in demand is a shift of the demand curveDeterminants of Demand –

Changes in tastes and preferences Changes in disposable income Changes in the number of buyers Changes in the prices of related goods Expectation of Future price

Market demand is the horizontal summation of individual demand curvesPersonal income tax decreased Normal Good – a good that when personal income increases demand increasesInferior Good – a good that when personal income increases you buy lessPoison milk – powdered milk mixed with regular milkWhen the price of the substitute increase the demand for the original product increasesWhen the price of the compliment increases the demand for the original product decreasesA change in quantity demanded is a movement along the original demand curveSupply – the amount of goods and services suppliers are willing and able to produce and offer for sale at various possible pricesDeterminants of Supply –

Change in Technology Change in resource costs Change in the number of sellers

Change in supply = a shift in the supply curveChange in quantity supplied = a movement along the supply curvePrice floor – a legal limit on how low you can sell a product forPrice ceiling – a legal limit on how high you can charge for a productHomework – 1930s Wheat is selling for $2 a bushel – Government sets a price floor at $3 a bushel – make a graph of itPrice Ceiling – 1973 – gasoline example – market price is $.60 – price ceiling was set at $.40 – rationing to solve the shortageHomework – Berkeley California – the going rate for an off campus room was $300 – the city counsel put a ceiling at $200 – graph and tell problem

QUIZ

2-16-07You want to know the percent increase in the marketHomework – Read A10 on Thursdays WSJWays to counteract a surplus

Increase demand Decrease supply (increase corporate income tax) Pay a producer not to produce Give the surplus as foreign aid

Ways to counteract a shortage: Get rid of the price ceiling

Why does the demand curve slope downward?1. Law of diminishing marginal utility (pp. 63)2. Substitution effect – as the price of a product goes up we will substitute out of that product and into something else3. Income effect – as prices increase your purchasing power decreases

Why is it important to know what the demand curve looks like?

TR – Price times quantity sold

When we make policies that influence the economy we ask economists what’s going to happen to

Consumer Surplus – the area below the demand curve down to the market price Producer Surplus – the area above the supply curve up to the market price Dead Weight loss

Homework – read chapter 4

2-19-078.25 is the prime rate as of 2-16-07Prime interest rate is the rate they charge to their best customers6.25 is the discount rateThe Federal Funds rate moves all day long

If at the end of the day a lot of banks are reserved deficient then the Federal Funds will go upFOMC – Federal Open Market CommitteeThe Discount rate will stay the same for at least six weeksPension plans – agreed payments over time according to your standing with the company401K – a retirement plan through your employerHomework – find out what you can about empirical evidence about Min. wageDialysis is a cost

2-21-07Antitrust – suits that prevent monopoliesSubscribers are increasing at an increasing rateGlass ceiling – top on how high you can go in an industryHomework – Labor force participation rate for women and for men; graph of the last 50 yearsOpportunity costsLeisure – the opportunity cost for men to give it up is high; it is low for womenWorkWhenever the quantity being produced is not equal to the market clearing quantity you are likely to have a misallocation of resources.What happens to consumer and producer surplus and in the whole process do we end up with a dead weight loss.Dead weight loss – an area that used to be a surplus but is no longer wither one

EXAM – surplus graph pp. 105I’m not going to pay – usually not true – Time is the price you pay

EXAM – Demand and supply and price for highwaysHomework – Read chapter 17Elasticity – deals with responsivenessPrice elasticity of demand – how does quantity demanded respond to a change in priceGenerally elasticity – a change in the numerator = the numerator responds a littleElasticity = %change in Qd/% change in PArch elasticity is the elasticity is what we use – between pointsA one percent change in price leads to a (elasticity) change in quantity demanded.

2-23-07Homework – invested $100,000 in the Dow Jones in Jan. 1 1989 and likewise in JapanArc elasticity is averaging the elasticity across the rangeElastic = relatively elasticWool is unitary elasticAssumption for perfectly elastic –

Homogeneous productWhenever you have something that is inelastic a price raise will increase total revenue.When you have elasticity a price raise will decrease total demand.

Nikkei - 38,915.87 to 18108.79 = 20807.08 = 46% drop = $46,000Dow - 2,256.43 to 12686.02 = 2,256.43 = 562% increase = $562,216.42

2-26-07Diminishing Marginal utility – with each additional unit of consumption less and less pleasure is gottenRisk aversion – concave utility functionIndifferent – same level of utility for different goodsOptimal consumption rule – consumer equilibrium – the equation of equality relating the utility per dollar of two goods

2-28-07Sub-prime loan – that’s made to people with poor creditAlan Greenspan said that it was timeShanghai dropped 9%Hedging – historically used as an insurance policy Hedge fund – go in and buy and sell futures – very risky – tend to have more moneyEquity fund – looks at what’s going up and goes for a sure thingBanks keep reserves for bad loans outside the required reservesIt is a sign that banks are doing well if they don’t have much in reserves for bad loansFDIC has a lot of money because very few banks have failed

When you put a tax on the item it shifts the supply up vertically by the amount of the taxHomework – make a relatively elastic tax graphHomework – Appendix to chapter 18

QUIZ

3-2-07Cigarettes excise tax – consumers pay mostIndifference curve characteristics –

Indifference curves have the same value at any point on the curve They slope downwards Tend to be convex A shift to the right is an increase in utility Indifference curves should never intercept Indifference curves fill the plane (graph) – every point on the graph has an

indifference curveHomework – chapter 19

3-5-07Budget lineEXAM – draw a demand curve derived from a graph with budget lines and indifference curves

EXAM – 12 Multiple choice, 12 definitions, then graphing

Adam Smith is a classical economistBased mostly on a perfectly competitive marketShirking – not doing what you’re supposed to be doing

Three types of Businesses Sole proprietorship

o You make your own decisionso You get all the profitso You’re only taxed onceo Easy to start

Business plan is essential to get a loan for start up.Big drawback is unlimited liabilityNot perpetual

Partnershipo You have help with startupo Double the workforce

Bad: you have to share the profitsUnlimited liability

Corporationo Limited liabilityo Lots of capitalo Division of labor

Corporate income tax has to be paid at about 35%Then the corporation pays dividends and puts some back in (retain earnings)

Discounted bond – you only pay a portion of the total principle and the interest builds until you reach the total principle and then you can collect

EXAM

3-9-07Option – the right to buy a stock at a certain price within a certain time periodMany execs get options as part of their payFed’s beige book – economic report from all 12 Federal Reserve areas and what they think is going to happenAccounts receivable – something owed to you2/10/30 = 2% discount if you pay me within 10 days of receiving the bill and you owe it to me in 30 daysHomework – make a production functionHomework – first 10 pages in chapter 20TP = total productMP = marginal product = change in output/change in input (usually labor)AP = average productImportant relationship between total average and marginal output

3-12-06Point of inflection – the point where the increasing changes from increasing at an increasing rate to increasing at a decreasing rate

Marginal will always go through the peak of averageMarginal leads the average – If marginal is above the average the average will be going upIf marginal is below the average the average will be going downA ray drawn from the origin to any point on the total product curve; the slope of that ray will be average product

EXAM – production function without numbersBreak even = normal profitEconomic profit = excess profit = profitTotal fixed costs – a cost that does not vary over a production periodVariable costs – costs that varying as production numbers varyFC + VC = TC (fixed costs + variable costs = total costs)Homework – read the rest of chapter 20

3-14-07

P=AR=MR=dIn perfect competition the price remains the same

3-16-07Manfred’s rules –

Always produce where the slope of the Total revenue curve is equal to the slope of total cost curve – where they are equal is the Q line

Where the Q* line intersects TR is the firms total revenue Where the Q line intersects TC is the firms total cost

The Slope of TR = MRThe slope of TC = MC

Always produce where MC = MR

3-26-07Leading economic indicatorsHomework – lookup the ten leading economic indicatorsA firm will shutdown when they are unable to cover all of their variable costsFab’s rules

Always produce where MC = MR and we call that our Q line Where the Q line intercepts the AR will be the firms price Where the Q line intersects the ATC is the firms cost per unit

Homework – Q = 20 Profit = 40 Cost per unit = 8 – make a total and average curve diagram with these numbers

The 10 components of the Index include:

1. Average weekly hours worked by manufacturing workers 2. Average number of initial applications for unemployment insurance 3. Number of manufacturers' new orders for consumer goods and materials 4. Speed of delivery of new merchandise to vendors from suppliers 5. Amount of new orders for capital goods unrelated to defense 6. Amount of new building permits for residential buildings 7. The S&P 500 stock index 8. Inflation-adjusted monetary supply (M2) 9. Spread between long and short interest rates (the yield curve) 10. Consumer sentiment

3-28-07IPO = Initial Public OfferingHomework – in the bookCharacteristics of a constant cost industry

As time passes there is generally no reason for the cost structure to increase or decrease

Generally the labor force will be semi skilled or unskilled Generally the input being used represents a small portion of the total input’s use Little technology changes

Characteristics of a decreasing cost industry As time passes there are reasons why the cost structure will decrease There is a good chance that the industry has something to do with technology External economies to scale

Characteristics of an increasing cost industry As time passes there are reasons for the cost structures to increase Quite often the labor force is a skilled one The input being used to produce the product represents a large portion of the total

input’s useSarbanes Oxley – passed after the Enron scandal saying that the accountants can’t be the same as the auditors

3-30-07Futures contract – today I will make a contract with you that you will pay me so much for something at a future dateCapital goods – plant and equipmentHedging – historically a form of insuranceFutures contracts are a form of insuranceTombstone – an advertisement for stock bonds and other stuffProspectus – gives information on a company such as what it does, who is on the board, ceos, a balance sheet, an income statementImperfect forms of competition has price seekersMonopolistic characteristics

One seller Lots of buyers Unique product Entry and Exit – next to impossible Demand curve for the monopolist is the same as the demand for the firm

Local monopolies are utilitiesHomework – look up the length of patentsHomework – make a shutdown monopoly

4-2-07Homework – read chapter 23Oligopoly is an industry that is dominated by a few firms

Few firms

Hard entry and exit

Type one oligopoly Limited number of buyers Homogeneous product Industrial

Type two has Heterogeneous product Lots of buyers Consumer products

Kink demand curve oligopoly If one firm raises their price no one else follows If one firm lowers their price everyone follows

The break between the two marginal revenue curves of kinked demand curve oligopolies is greater the greater the discrepancy between the slope of the two revenue lines.

Oligopolies that have a kink in it tend to have prices that are sticky. And tend to be so around the kink.

They are sticky because of total revenue. Prices stick around the kink in the demand curve.

Homework – look and see what they tried to do in Canada – they put a huge tax on cigarettes in an effort to keep people from starting

Cartel oligopoly – a group works as one

QUIZ

4-4-07Diffusion index – tells us what percent of the market are doing something (could be any aspect of the surveyed) – Not only does it tell us the extent of what’s happening it also has recent historical importanceMutual fund – a collection of stocksIndexed mutual fund – a fund that follows an indexHomework – read about price discriminationPrice discrimination – selling things at different prices to different people

Buying a car They ask what you will pay in a monthly payment say no You want to know the invoice price of the vehicle They still make a profit at invoice – hold back is a certain percentage they will

make no matter what – manufacturer incentives as well (per model or brand)

4-6-07Price DiscriminationFirst – discrimination among buyersSecond Degree – discrimination by quantity – airlines Third Degree – discrimination by group/time/types

No load mutual fund – no commissionLoaded – pay a commissionClosed end fund – not taking more money

Homework – finish graphs for monopolistic competitionPerfect vs. Imperfect

Price is lower with perfect Quantity is greater in perfect Efficiency – producing output at the lowest possible cost MC = P – economists like this because P is the value to consumers – If we get the

price = MC then the cost to produce it is exactly equal to our value of it.Perfect competition – MC = PA long run average cost curve is developed from he tangent points on the short run average cost curves.Moving the cost structure down in economies of scale

More efficient machines Division of labor Learning by doing, you create more efficient ways to do things Supplies in bulk

Diseconomies of scale Bureaucratic cost lost

EXAM

4-9-07Unemployment is at 4.4% - very very good

Natural Rate of unemployment – natural number of transfers – 4.5-6%Homework – pp. 587-588 and Ch. 6Marginal Revenue profit – MRP = the additional profit in regards to a costUnemployed – in order to be so

Be looking for a job Be capable of work

o Children (Under 16)o Disabledo Incarcerated

Must be willing to work Must be without work

Bureau of Labor stats sends out surveys to 60,000 families every month

Definition of the labor forceTotal population - those not capable= potential labor farce - unwilling or not looking for work= active labor force - military personnel= Civilian Labor Force = CLF - those employed= unemployed

Unemployment rate is Unemployed/CLF * 100 = unemployment rate

137.3 Million in 1998 – unemployment was 6.23 million2006 4.3% overall unemploymentHigher or lower unemployment groups

o 16-19 year olds – higher (lack of education)o Men – highero Women – lowero White – lowero Black – highero Asian – lowero Hispanic – higher

Women make less than men for some jobs historically whyo Glass ceilingo Risk of maternity leaveo Higher labor jobso Location – men moved and women followed

4 different types of unemploymentBusiness cycle – recurrent non-periodic fluctuation in business and economic activityRecession (Classic) – two consecutive quarters in which GDP was negativeRecession (Neo) – a downward trend in the business cycle in which employment, output, and spending is going down

GDP is made up of three different types of spendingo C = Consumer spending – largest component of GDPo I = investment spendingo G = government spendingo Nx = foreign spending – exports – imports

General or cyclical unemployment – unemployment caused by too little total spending in the economy.How do we solve General UnemploymentIncrease spending

Reduce taxes on personal and corporate Lower interest rates raises I spending Increase Government spending

1930s – really high - 25%In the same time frame parttime employment increased bigtimeUnderemployment – skyrocketed…Safety Nets – we have these today and they would make a large unemployment number harder to bear because it would topple over the government via spending

1940-1945 – very very low unemployment – 1-1.5%Several Million came into the labor force who never expected to go into the labor force

Recession times since 194548-4953-5457-5860-6169-7073-758081-82 – worst since the great Depression90-9101

4-13-07Options marketAn option gives you the right to purchase a stock at a specific price at a specific time

Options tend to be very riskyStriking price – the price for which you can by it

Structural unemployment: unemployment that is caused by a mismatching of jobs and workers skills

Can be due to a decrease in the demand for a specific type of laboro A change in technologyo A declining demand for a particular product can cause structural

unemployment An increase in the supply of a specific type of labor

Solving structural unemploymento Retraining programso Incentives for the unemployed industrieso Government sponsored relocation

Seasonal unemployment: unemployment that reoccurs regularly during the same season of the year

o Nature can cause seasonal unemploymento Social customs

Solving seasonal unemploymento Compliment seasonal employment

Frictional Unemployment: When we are unable to synchronize job endings and job beginnings (generally shorter)Solving frictional unemployment

o Don’t quit a job until you have another oneo Intermediate institutions

4-18-07Tremendous pent up demand for consumer good caused rampant inflation during 1946-1947

Early 50s – psychological inflation – people were remembering shortages and rationing – people bought a lot more than they needed (hoarding) in fear of a WWIII – rising demand curves caused higher prices caused inflation – there really wasn’t any need for saving therefore it was psychological

61-62 – Kennedy was the pres and US Steel wanted to raise prices – if the price of steel rose then the prices of everything else would rise as well – Kennedy requested them to keep the prices down (jawboning) – mid 60s Johnson was the pres and he couldn’t keep them from raising prices

Late 60s – high inflation from the Vietnam War

71 – Nixon was pres – he put in a wage and price freeze to solve the problem of inflation – his Republican base was enraged with price restrictions – increasing benefits and changing model and changing job titles got around the freezes

74-75 – inflation hit double digits – oil (opec was formed) – backed up inflation from the freezes hit now

Homework – lookup the CPI from 1975 until present and the inflation rate since 1984 and the prime interest rate from 1975 till present

Late 70s-present – 79-80 was around 12-13%

Burns Accommodated the demand for moneyVolcker keeps supply within the target 1981 – prime interest rate went up to 20.5%GDP = C + I + G + Nx

Volcker helped to cause the greatest recession since the Great Depression, but when you have a problem you have to pay a price to fix it.

Types of inflation – Demand pull inflation – Inflation caused by too much total spending in the

economy. o It generally takes place at or near full employmento Usually blamed on consumers

Solving Demand pull inflationo Let interest rates increaseo Increase taxeso Decrease G spending

Phillips curve – the trade off of inflation and unemployment

Cost push inflation – Caused by power groups within society

o Labor unions Escalator clauses – an automatic increase in wages

Escalator clause 1 – where wages are attached and adjusted to the inflation rate – you don’t know what you’re going to get but you will beat inflation

Escalator clause 2 – has a specified amount of wages – set increases in wages – you don’t know that you will beat inflation

o Monopoly powers OPEC

Solving cost push inflation Prevent use of escalator clauses

o In 1979, Carter said that anyone who had a government contract you have to limit your wage increases to 6%

Wage and price freezeo Nixon tried this oneo Stronger antitrust laws

Homework – get the data points for the unemployment rate and the inflation rate from 1960 to the present – graph them from 60-83 – make two copies – leave the dots unconnected of one and connect them on another

Keynesian Phillip’s curve shows the tradeoff between inflation and unemployment2/3 of the cost of doing business is laborEXAM – wage and price spiral

ECONOMIC GROWTHWe measure economic growth with GDPNominal GDP – GDP not adjusted for inflationReal GDP – GDP that is adjusted for inflationEvery year nominal GDP goes upReal GDP does not go up every year

Real GDP per capita is a very accurate estimate of an economy’s growth Adjusts for inflation And population

Homework – look at Nicaragua – 79% live on less than $2 a day – 40% on less than $1 a day – find their per capita GDP - $908

What things help a country grow Natural resources

o Oilo Bauxiteo Lumbero Coalo Natural Gaso Watero Fertile Soilo Sun

Real capital goodso Plant and equipmento Infrastructure

Human capitalo Skilled workforce

o Healthy workforceo Tech Savvy workforce

New technologyo New production meanso New productso New ideas

Joseph Schumpeter – said that you need to break tech into invention and innovation

Sociopolitical environment – you have to have a stable country

Theory Z of management – family style of management

4-22-07Employment act of 1946 – said that one of the chief economic goals for our economy is to have the government concentrate on keeping unemployment lowStagflation – a stagnating economy along with inflation

Theory X of management – autocratic management – flows from the top down – very command orientedTheory Y – workers input is more important – more group decision making – more teamworkTheory Z – Japanese – the company is your family – you stay there your whole life

Two sector circular flow diagram

Keynesian Economics Arguably the most influential economist of the 20th century LEFT!!! Government control – particularly in fiscal policy

Three most famous books in economics Wealth of Nations (1776) Das Kapital (Marx, 1850) The General Theory (Keynes, 1936)

Multiplier effect – if you make a small change in injection or a leakage and it results in a larger change in total

Homework – a=60, b=2/3 – graph it – change I by 15 – show new set of numbers with a C+I curve – change G by 20 – graph C+I+G and show final equilibrium

QUIZ4-25-07FINAL CHAPTERS – 5-7, 10-12When stock markets are going in the opposite direction of ours – it helps to diversify risk by investing in other stock marketsInjection – if they go up the economy expands

Investment spending Government spending Exports

Leakages – if they go down the economy contracts Taxes Imports Savings

Homework – understand the multiplier process a = 50 b= 4/5 – make a consumption and a savings function – change I by 10 and note the increase in income

4-27-07In equilibrium ejections = leakages0 injections and 0 leakages at intersection of I and SfMPC = 2/3The initial spending with taxes is different than the initial spending with G or IBudget balance multiplierUp to the Great Depression we had classical and neo-classical economistsKeynes – “In the long run we’re all dead.”

4-30-07Government expenditures

Transfer payments – a payment made by the government to consumers for which consumers do nothing in return, at that time.

Military Interest on the national debt

Three largest sources of income Personal income tax Social security taxes Corporate Income tax

Excise tax – a tax on a particular item

Homework – find tax brackets, tax on a quart of Alcohol in Kentucky

Our tax system is a progressive graduated marginal tax rateMarginal tax rate – pay per bracket/amount0 – 30,000 = 15%30 – 70,000 = 20%70 – 150,000 = 30%

EXAMThe family makes $80,000

Tax evasion – illegal means of not paying taxesTax avoidance – a legal means of not paying taxes – generally for people who have higher incomes

Municipal bond – local bonds – tax free

FICA7.65%6.2% goes to SSI$93,000 is the max

What has the Federal Gov done to make the sales tax less regressive

Tax Year:

Filing Status:

If your taxable income is between...

your tax bracket is:

and %

and %

and %

and %

and %

and %

5-2-07Indexing – when you adjust something for inflationSSI is indexedTax brackets are indexedIndexing did not take place until the mid 80sBracket creep – moving up tax brackets when inflation is not met with indexingIn China they just increased the observe requirements for banks and tightening the money supply

Pension fund – a retirement plan

FISCAL POLICY – the use of government spending and taxation to manipulate the economy2001 – tax cuts – fiscal policyIncrease the money supply – monetary supplyOld rules of public finance (Adam Smith)

The purpose of government spending – to provide goods and services which strictly private arrangements would not provide enough of

o Militaryo Infrastructureo Educationo Legal system

The purpose of taxation is to provide money for number one. The government budget rule – never spend more than you take in

New Rules of Public Finance in the 1930s (Paul Samuelson) Ditto ditto ditto plus to help solve the problem of inflation and unemployment Purpose of taxation – ditto ditto plus to help solve the problem of inflation and

unemployment The government budget rule

o If we find the economy in a recession the budget should move in the direction of deficit

o If we find the economy in an inflationary period the budget should move in the direction of surplus

EXAM:Counter-cyclical discretionary fiscal policy – attempts to break the cyclical downturns Counter-cyclical discretionary monetary policy – same thing with different toolsExternality – events beyond control that affects the values of other things in its area

MONEY:How do you know if a society has money – universal medium of exchange

M1 – the most liquid form of money Coins and currency Checking accounts Travelers Checks

FEDERAL RESERVECreated in 1913Started working in 1914It’s our central bank12 districtsTechnically and legally a private corporation

Commercial banks own the Federal Reserve – called member banksVery independent mainly because it does not need money from CongressA nonprofit organization that makes $10s of Billions a yearIt is there to help the federal government

5-7-07Multiple expansion of the money supplyAssumptions

Reserve requirement is 20% When you take out a loan you take it all in your checking account The bank loans out all excess reserves To get the process started a little boy finds a $1000 in his grandparents’ basement

We don’t get the maximum because: All banks don’t always loan out all their excess reserves People don’t always take out loans in DD

EXAM: Balance sheet, correct terms, punch it into the max increases in money supply

The Federal Reserve Monetary Policy weapons Open market operations Reserve requirement Discount rate

Use of these tools during a recession Buy gov. sec. Lower the requirement Lower the interest rate

Use of these tools during inflation Sell gov. sec. Raise the requirement Raise the interest rate

5-9-07Misery index – unemployment + inflationToday – 7.5%1976 election: Carter and Ford (incumbent): 7.7% + 5.75% = 13.5%1980 election: Reagan and Carter (incumbent): 7.1% + 13.5% = 20.6%1984 election: Mondale and Reagan (incumbent): 7.5% + 4.3% = 11.8%1988 election: Ducaucus and Bush (incumbent): under 10%1992 election: Clinton and Bush (incumbent): 10.6%1996 election: Dole and Clinton (incumbent): 6.3%2000 election: Gore (incumbent) and Bush: 7.7%

2004 election: Bush (incumbent) and Kerry: 8.1%

Chapter 7