Econ 4.3

Monday, March 15, 1999

Announcements: Exam #3 has been rescheduled and will be held on Wednesday, April 7th instead of April 2nd as originally scheduled.

Lecture notes:  

Fiscal Policy

• Studies done show that Fiscal Policy has significant influence on economy
• Expenditure Multiplier larger than tax multiplier
• Discretionary Fiscal Policy: changes in taxes or spending that are the result of deliberate changes in government policy
• Fiscal Policy - active tool of management
• Primary Source of influening economy is actions of monetary policy
• Board of Governors of Federal Reserve System are not elected
• 12 Regional Federal Reserve Banks (Legally privatedly owned)
• Monetary Policy managed by board of governors of Federal Reserve
  

Measuring GDP Natural Income Accounting Approach Overview

• GDP = C + I + G + (EX - IM)
• Value of each type of new final product is equal to quantity produced times market prices or pq
• Value of GDP, then, could be written as:
• GDP = p₁q₁ + p₂q₂ + ... + p_nq_n
• Alternatively, using indexes to measure prices and quantities
• GDP = PQ

Measuring GDP Money Circulation Approach

• GDP transactions are ultimately monetary transactions
• Define M as annual quantity of money available within the economy
• Money is anything generally acceptable in trade
• Define V as velocity of money circulation on the national average number of times the average dollar is used for transactions
• Therefore
• GDP = MV

Summary: Measure of GDP

• GDP = C + I + G + (EX - IM)
• GDP = PQ
• GDP = MV
• Therefore
• MV = PQ = GDP
• M, the stock of money becomes important
• Take the long term economic growth rate and increase money supply by that percentage - this would allow economy to grow with out putting pressure on prices

Functions of Money

• Medium of Exchange
• Unit of Account
• Store of Value
• Defferred Payment Standard

Fiat Money

• Fiat money has no neccessary intrinsic value -- it has been declared by government law (by fiat) to be money and have value as "legal tender" (US Federal Reserve Note is fiat money)