Supply Side Economics

.Makes changes in AS but not AD and it determines the level of inflation, unemployment, and economic growth.

.Lower marginal tax rate induce more work this AS increases.

.Makes leisure more expensive and make work more attractive.

Supply Side Economics- Support policies that promote GDP growth by arguing that high marginal tax rates along with the current system of transferred payment

Ex. Unemployment compensation,

Welfare Programs that provided disincentives to work, invest, innovate and undertake entrepreneur inventions.

Incentive to Save and Invest

.High Marginal Tax Rate can reduce the rewards for savings and investments

.Consumption might increase, but investment depend upon savings

.Lower Marginal Tax Rates encourage saving and investment

Foreign Exchange/ Flexible & Fixed Rates

Foreign Exchange

Foreign Exchange- Any transactions that occurs in the balance of payments necessitates foreign exchange.

.Exchange Rate is determined in the foreign currency markets.

.In order to purchase souvenirs in France, it is first necessary for Americans to sell (Supply) their dollars and buy Euros (Demand.

Changes in the Exchange Rates

.Exchange Rates are a function of the supply and demand for currency

.An increase in the supply of a currency will decrease the exchange rate of a currency.

.A decrease in supply of a currency will increase the exchange rate of a currency

.An increase in demand for a currency will increase the exchange rate of a currency

.A decrease in demand for a currency will decrease the exchange rate of a currency

Appreciation and Depreciation

.Appreciation of a currency occurs when the exchange rate of the currency increases

.Depreciation of a currency occurs when the exchange rate of that currency decreases

.The more you supply, the more the value depreciates. The more you demand, the more the value of the money appreciates

Exchange Rates Determinants

.Consumer Rates

.Relative Income

.Relative Price Level

.Speculation

Exports and Imports

Exchange Rate is a determinant of both exports and imports

.Appreciation of the dollar causes American goods to be relatively more expensive and foreign goods to be relatively cheaper, thus reducing exports and increasing imports

.Depreciation of the dollar causes American goods to be relatively cheaper and foreign goods to be relatively more expensive, thus increasing exports and reducing imports

As two currencies trade:

.One supply line will change while the other demand line will also change

They will move in the same direction

.One currency will appreciate while the other will depreciate

Flexible Rates

.Based on supply and demand of that currency versus the other currency

.Very sensitive to the business cycle and it provides options for investment

Fixed Rates

Based on countries willingness to distribute currency and to control the amount

Financial Sector

Financial assets vs. Financial liabilities

Financial assets
.Stocks and bonds that provide expected future benefits
.Benefits the owner only if the issue of the asset meet certain obligations

Financial liabilities
.It is encouraged by the issuer of a financial asset to stand behind the issued asset

Interest rate-is the price paid for the use of a financial asset

Stocks- are Financial assets that represent ownership in a corporation

Bonds-are the promise to pay a certain amount of money plus interest in the future

What banks do
A bank is a financial intermediary
.Uses liquid assets to finance the Investments of Borrowers
.process is known as Financial reserve banking
.A system in which depository institutions hold liquid assets less than the amount of deposits
.Can take form of currency in Bank vaults Bank Reserves deposits held out the Federal Reserve

What banks do-basic accounting review

T account -Statements of assets and liabilities
Assets-item see how much a bank holds legal claim the uses of funds in Financial intermediaries

Time Value of Money

Time Value of Money

.Is a dollar today worth more than a dollar tommorow?
-YES
.Why?
  -opportunity and inflation
   - this is the reason for changing and paying interest
. Let V=future value of $
  P=present value of money
  R=real interest rate (nominal interest rate-inflation rate) expressed as a decimal
  N=years
  K=number of times interest is credited per year

Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded.

1. What happens to the quantity demanded money when interest rates increase?
Quantity demanded falls because individuals would prefer to have interest becoming assets instead of burrowed liabilities

2. What happens to the quantity demanded when interest rates decrease?
  Quantity demanded increases. There is no incentive to convert cash into interests earning assets

3. Money demand shifters
1.Change in price level
Change in income
Change in taxation that affects investment

If the FED increases the money supply a temporary surplus of money will occur at 5% interest.
The Surplus will cause the interest rates to fall to 2%

How does this affect AD?
Increase money supply-decrease interest rates_increase investment- increase AD

Decreasing money supply-how does it affect AD?
Decrease money supply-decrease interest rate-decrease investment - decrease AD

Jeremiah Paresa's Video On Monetary Policy

Go Check It Out!

https://youtu.be/dEg7m9qvoUk

Jeremiah Paresa's Video On Monetary Policy

Go Check It Out!

Fiscal Policy

. Changes in the expenditures or tax revenues in the federal government
-2 tools of fiscal policy
Taxes and Spending

Deficits, Surplus, and Debts 

. Balanced Budget
. Revenues = Expenditures
Deficit Revenue<Expenditures
Budget Surplus Revenues.Expenditures
.Government Debt
Sum of deficits- sum of expenditures
Government must burrow money when they are in a budget deficit
. Government burrows from
-individuals
-corporations
-financial institutes
-other governments or foreign leaders

Fiscal Policy Options

.Discretionary fiscal policy (action)
Non-Discretionary fiscal policy (no action)
Expansionary Fiscal Policy
. combat recession
. increase government spending
.decrease taxes


Contractionary Fiscal Policy
.combat inflation
.decrease government spending
.increase taxes