Total saving = Y – T + Tr – C + (T – G – Tr) = Y – C – G
I = R + Inflation  causes shoe leather, menu, index, uncertainty costs.
LF = U + E –> types of U: structural (mismatch of demand and supply), cyclical (when Y < Y*), frictional (time to find job)
y = a*f(k,N)
Y = a*n(1-a)*k(a)
Y= a*(k/n)(a) = MPN
Wage/Price = utility of leisure/utility of consumption if w/p increase, SE: uL increase, uC decrease, IE: uL, uC decrease
Ns (labour supply) is affected by PVLR, tax rates on income and consumption, value of leisure (unemployment benefits)
Price don’t affect w/p in long run since both w and p increase the same so PVLR is same and Y and N same.
If A, K, population or labour income taxes increase and IE<SE, N* will increase.
MPK = UC (r+d+mm) and if MPK > UC then K* must increase (to decrease MPK) so I increases.
k(t+1) or k*=(1-d)k+I so k(t+1)-k=I-dk(t) = net investment
Future c = (y+a-c)(1+r)+Yf
Permanent income hypothesis (PIH): Consumers divide consumption in half in periods, regardless of income so savings are negative and positive,
PIH is limited since during recession C decrease and liquidity constraints happen.
Temporary increase in our income means same Yf different y+a.
Temporary increase in future income means different Yf same y+a
If r increases and we are borrowers then SE shifts resources from C to Cf, for lenders but income effect shifts Cf to C.
If income tax decreases, income effect increase C, L, but SE increase C decrease L.
Y= C+ I + G where C(PVLR: y. yf, a) and I(r,A,k) in goods market equilibrium I = S = Y – C – G
Fiscal policy uses G and Taxes to reach Y* and Tax revenue = T0 + tnY while Transfers = Tr0 - gY
Deficit = g + Tr0 – gY + INT - (T0 + tnY) = G + INT(0) + Tr0 + T0 (both 0) – gY - tnY == deficit = g - Y*(g + tn) for structural deficit
Cyclical deficit == actual (include T0, Tr0) – structural deficit
Deficits are counter cyclical so y increases deficit falls, y decreases deficit increases due to automatic stabilisers
Balanced budget is bad because, say consumer confidence falls so government must increase G or cut T which would shit IS to the left and decrease
Y. Also, G provides police infrastructure and education human capital while crowds out private sector.
Debt = value of outstanding government bonds and change in debt is deficit IF high Deficit due to G Investment then A increase so long term
growth. But if high Deficit due to G Consumption or low T (high C) then lower S and I so High G crowds out I and thus long term decline.
Public payback of govt debt irrelevant since government will just introduce new taxes on future generations.
Ricardian equivalence claims due to PIH G by tax or debt is the same since debt is always financed by tax in long run (No reality).
ATR = total tax/pre-tax income WHILE MRT = tax on additional income. If MRT same but ATR increase, then Y decreases so income effect and Ns
increase. If ATR same MTR increase, then substitution effect so Ns decrease since leisure becomes cheaper.
If T is lowered and income effect dominates then Ns decrease so MPK decrease so I and S decrease IF MRT decrease, then Ns increase so MPK and I
and S increase
Money is medium of exchange legal tender unit of account for hetero goods and store of value
Liquidity is the cost of buying or selling an asset for cash in time and expenses AND M1 is cash and check account (liquid stuff).
Open Market Operation is when CB acquires govt bonds from public accessed market in return for cash increase M
Reserves are liquid assets held by Private Banks at CB for withdrawals or paying checks (can’t loan out).
When Fed buys securities from banks, supply of reserves increase. Securities yields are lowered so rates fall. Banks also have lots of loanable so
they decrease rates to get rid of these reserves.
M is the required reserve ratio < 1 and Total Reserves =m*TD
CB makes money by interest on securities assets but no interest on reserve liability, collected interest goes to Treasury.
CB affects economy by overnight rates which is correlated with short term interest of loan also affects price of financial assets and lower interest
rates which increase share price and income effect increase C also loose monetary policy depreciates dollar and boosts exports, DISCOUNT RATE
AND RESERVE RATIO also affect Ms.
Money demand increases if P increases or real income increases or liquidity of NM decreases, or r decreases, or inflation decreases. AND Interest
rates and P of NM is inverse related since (DV)P=100/(1+i)
If public debt/nom GDP ratio is growing CB can be pressured to monetize the debt by buying debt with reserves, then the reserves will increase,
and M will increase, and P will increase so inflation increase and Real interest on debt decreases. Also, CB will just repay the interest to treasury
THUS more independent bank equals less inflation.
Fed wants to increase r when r<r*, y>y*, u<u*, n>n*
Fed’s discretionary rule making allows it to choose from competing policies and give it time to collect all info on position relative to Y* and inflation
target before it makes a move. Hawks care about inflation more.
Liquidity traps happen when consumption and investment are down but nominal rates are close to 0 and cannot be lowered since the NM would
pay less interest than M which is impossible.
Only way to get out of cost-push inflation is a deep recession. Demand- pull is easier, just raise rates.
Cost of permanent lower inflation is temporary high U, cost of temporarily low U is permanently high inflation.
Unexpected inflation can cause capital tax distortions, caise fiscal imbalances and also borrowers and lenders are affected.
Too low interest rates cause liquidity excess and bubbles, also cant fight recession.