Download Day 5 PPT

Principles of
Macroeconomics
Day 5
Dr. Andrew L. H. Parkes
“A Macroeconomic Understanding for use in Business”
卜安吉
http://krugman.blogs.nytimes.com/2010/09/15/its-demand-stupid/
September 21, 2010
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In this chapter, look for the answers to
these questions:

What are the main types of financial institutions
in the U.S. economy, and what is their function?

What are the three kinds of saving?

What’s the difference between saving and
investment?

How does the financial system coordinate saving
and investment?

How do gov’t policies affect saving, investment,
and the interest rate?
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Financial Institutions
The financial system: the group of
institutions that helps match the saving of one
person with the investment of another.
 Financial markets: institutions through which
savers can directly provide funds to borrowers.
Examples:

– The Bond Market.
A bond is a certificate of indebtedness.
– The Stock Market.
A stock is a claim to partial ownership in a firm.
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Financial Institutions

Financial intermediaries: institutions
through which savers can indirectly
provide funds to borrowers. Examples:
– Banks
– Mutual funds – institutions that sell shares
to the public and use the proceeds to buy
portfolios of stocks and bonds
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Different Kinds of Saving
Private saving
= The portion of households’ income that is
not used for consumption or paying taxes
=Y – T – C
Public saving
= Tax revenue less government spending
=T–G
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National Saving
National saving
= private saving + public saving
=
(Y – T – C) +
=
(T – G)
Y – C – G
= the portion of national income that is not used
for consumption or government purchases
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Saving and Investment
Recall the national income accounting
identity:
Y = C + I + G + NX
For now focus on the closed economy case:
Y=C+I+G
Solve for I:
I = Y–C–G
national saving
= (Y – T – C) + (T – G)
Saving = investment in a closed economy
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Budget Deficits and Surpluses
Budget surplus
= an excess of tax revenue over govt spending
= T–G
= public saving
Budget deficit
= a shortfall of tax revenue from govt spending
= G–T
= – (public saving)
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ACTIVE LEARNING
A. Calculations
1
Suppose GDP equals $11 trillion,
consumption equals $7.3 trillion,
the government spends $2.2 trillion,
transfers are zero, and has a budget
deficit of $500 billion.
Find public saving, taxes, private saving,
national saving, and investment.
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ACTIVE LEARNING
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B. How a tax cut affects saving
Use the numbers from the preceding exercise,
but suppose now that the government cuts
taxes by $300 billion.
 In each of the following two scenarios,
determine what happens to public saving,
private saving, national saving, and investment.

1. Consumers save the full proceeds of the
tax cut.
2. Consumers save 1/3 of the tax cut and spend the
other 2/3.
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ACTIVE LEARNING
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C. Discussion questions
The two scenarios from this exercise were:
1. Consumers save the full proceeds of the
tax cut.
2. Consumers save 1/3 of the tax cut and
spend the other 2/3.
Which of these two scenarios do you think
is more realistic?
Why is this question important?
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SPACE
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ACTIVE LEARNING
Answers, part A
Given:
Y = 11.0,
C = 7.3,
1
G = 2.2,
G – T = 0.5
Public saving = T – G = – 0.5
Taxes: T = G – 0.5 = 1.7
Private saving = Y – T – C = 11 – 1.7 – 7.3 = 2.0
National saving = Y – C – G = 11 – 7.3 – 2.2 = 1.5
Investment = national saving = 1.5
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ACTIVE LEARNING
Answers, part B
1
In both scenarios, public saving falls by
$300 billion, and the budget deficit rises
from $500 billion to $800 billion.
1. If consumers save the full $300 billion,
national saving is unchanged,
so investment is unchanged.
2. If consumers save $100 billion and spend
$200 billion, then national saving and
investment each fall by $200 billion.
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Public Policies

Tax Policies –
– incentives which increase or decrease the price

Spending Policies –
– incentives which increase the amount of
money

Spending policies right now are called
“Stimulus” Packages by most governments
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Public Policies

These are very simple generalizations
– However they will give you some idea of why
the two political parties in America do not
agree, and
– May help you to understand why the
Republican Party is whining so much …
September 21, 2010
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Public Policies

In America today, the Conservative or
Republican Party (GOP) is in the minority
or opposition.
– They are against all taxes
– For minimal government – justice system
mostly, that is to support private property
– Pro – Business – usually support most
business organizations
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Public Policies

In America today, the Liberal or
Democratic Party is in the majority or in
power.
– They are against taxes on the middle class
– For a regulatory government – helping keep
the businesses from dominating consumers
– Support business interests yet not big
conglomerate multinationals, to some degree
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