ECON100 College of San Mateo Macroeconomics Taxable Income Questions


College of San Mateo

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Two Macroeconomics questions:

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After reading Ch. 16 of Mankiw, read the press release of the Federal Open Market Committee (FOMC), and answer the following questions. 1.) Given its “statutory mandate”, what two goals is the FOMC trying to meet? Current Economic Conditions 2. a) What has been happening recently to “overall economic activity” (referring to real GDP)? b.) How is the economy in terms of the labor market, job creation, and the unemployment rate? c.) The release notes two components of spending that have been weak recently. What are they? Actual Inflation and the FOMC’s Inflation Objective. 3.a.) What is the FOMC’s objective for inflation? b.) In the past twelve months, what has “overall inflation” been? Policy Action Taken 4.a.) What action did the FOMC take at its meeting with regard to its target range for the federal funds rate? b.) What two factors did the FOMC cite to justify this policy change? c.) What factors will the FOMC consider in determining the size and timing of future adjustments to the target range for the federal funds rate? Economic Outlook 5.) What does the Committee see as the most likely outcomes for economic activity, labor market conditions, and inflation? For release at 2 p.m. EDT October 30, 2019 Information received since the Federal Open Market Committee met in September indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. (more) For release at 2 p.m. EDT October 30, 2019 -2- Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against this action were: Esther L. George and Eric S. Rosengren, who preferred at this meeting to maintain the target range at 1-3/4 percent to 2 percent. -0- For release at 2 p.m. EDT October 30, 2019 Decisions Regarding Monetary Policy Implementation The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on October 30, 2019: • The Board of Governors of the Federal Reserve System voted unanimously to lower the interest rate paid on required and excess reserve balances to 1.55 percent, effective October 31, 2019. • As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive: “Effective October 31, 2019, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-1/2 to 1-3/4 percent. In light of recent and expected increases in the Federal Reserve’s non-reserve liabilities, the Committee directs the Desk to purchase Treasury bills at least into the second quarter of next year to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. The Committee also directs the Desk to conduct term and overnight repurchase agreement operations at least through January of next year to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation. In addition, the Committee directs the Desk to conduct overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.45 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day. The Committee directs the Desk to continue rolling over at auction all principal payments from the Federal Reserve’s holdings of Treasury securities and to continue reinvesting all principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month. Principal payments from agency debt and agency mortgagebacked securities up to $20 billion per month will continue to be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. Small deviations from these amounts for operational reasons are acceptable. (more) For release at 2 p.m. EDT October 30, 2019 -2- The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions.” • In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point decrease in the primary credit rate to 2.25 percent, effective October 31, 2019. In taking this action, the Board approved requests to establish that rate submitted by the Boards of Directors of the Federal Reserve Banks of Minneapolis and San Francisco. This information will be updated as appropriate to reflect decisions of the Federal Open Market Committee or the Board of Governors regarding details of the Federal Reserve's operational tools and approach used to implement monetary policy. More information regarding open market operations and reinvestments may be found on the Federal Reserve Bank of New York’s website. Chapter 10-13, 15-17 Chapter 10: Financial Institutions ● Financial system ○ Group of institutions in the economy ■ That helps match one person’s saving with another person’s investment ○ Moves the economy’s scarce resources from savers to borrowers Financial institutions include: ● Financial markets ○ Savers directly provide funds to borrowers, via ■ the bond market ● Bond: certificate of indebtedness/IOU ○ Date of maturity, when the loan will be repaid ○ Rate of interest, paid periodically until the date of maturity ○ Principal, amount borrowed ● Borrowing from the public by issuing bonds ○ Done by large corporations, the federal government, state and local governments ● Term: length of time until maturity ○ A few months, 30 years, in perpetuity ○ Long-term bonds are riskier than short-term bonds ■ Long-term bonds usually pay higher interest rates ● Credit risk: probability of default ○ Probability that the borrower will fail to pay interest and/or repay principal ○ Borrowers with higher probability of default pay higher interest rates. ○ U.S. government bonds pay low interest rates ○ Junk bonds, issued by financially shaky corporations, pay very high interest rates ● Tax treatment ○ Interest on most bonds is taxable income ○ Municipal bonds ■ Issued by state and local governments ■ Holders of municipal bonds do not pay federal income tax on the interest income ■ Result: municipal bonds pay lower interest rates ■ the stock market ● Stock: claim to partial ownership in a firm • ○ A claim to a share of the profits that a firm makes ● Organized stock exchanges ○ Stock prices: determined by demand for, and supply of, existing shares ● Equity finance (initial public offering, IPO) ○ Sale of stock to raise money ● Stock index ○ Average of a group of stock prices (example: Dow Jones Industrial Average) ● Financial intermediaries ○ Savers indirectly provide funds to borrowers through intermediaries such as ■ banks ● Take in deposits from savers ○ Banks pay interest on deposits ● Make loans to borrowers ○ Banks charge interest on their loans ■ mutual funds ● Institutions that sell shares to the public ● Use the proceeds to buy a portfolio of stocks and bonds ● Advantages – ○ diversification; professional money managers National Income Accounts: ● Rules of national income accounting ○ Important identities ● Identity ○ An equation that must be true because of the way the variables in the equation are defined ○ Shows how different variables are related to one another Accounting Identities ● Gross domestic product (GDP) ○ Total income ○ Total expenditure ● Y = C + I + G + NX ○ Y = gross domestic product, GDP ○ C = consumption ○ I = investment ○ G = government purchases ○ NX = net exports; exports minus imports ● Closed economy ○ Doesn’t interact with other economies ○ NX = 0 ● Open economy ○ Interacts with other economies ○ NX ≠ 0 ● Assume closed economy: NX = 0 ● ● ● ● ● ● ● ● ● ○ Y=C+I+G National saving (“saving”), S ○ Total income in the economy that remains after paying for consumption and government purchases Y–C–G=I S=Y–C–G S=I T = taxes minus transfer payments ○ S=Y–C–G ○ S = (Y – T – C) + (T – G) • Private saving Y – T – C ○ Income that households have left after paying taxes and spending on consumption Public saving T – G ○ Tax revenue that the government has left after paying for its spending Budget surplus: T – G > 0 ○ Excess of tax revenue over government spending; government collecting more in taxes than it is spending on goods and services Budget deficit: T – G < 0 ○ Shortfall of tax revenue from government spending; government spending on goods and services is greater than tax collections Saving and Investing ● Accounting identity: S = I ● Saving = Investment ○ For a closed economy as a whole, one person’s savings can finance another person’s investment The Market for Loanable Funds ● Market for loanable funds ● Market ○ Those who want to save supply funds ○ Those who want to borrow to invest demand funds ● One “price”—the interest rate. It is simultaneously ○ The return to saving ○ The cost of borrowing ● Assumption ○ Single financial market ● Supply and demand of loanable funds ○ Source of the supply of loanable funds ■ Saving ○ Source of the demand for loanable funds ■ Investment ○ ● ● ● Price of a loan = real interest rate ■ Borrowers pay for a loan ■ Lenders receive on their savings ○ Supply and demand of loanable funds ○ As interest rate rises ■ Quantity of loanable funds demanded declines ■ Quantity of loanable funds supplied increases ○ Demand curve ■ Slopes downward; as cost of borrowing rises, people borrow less ○ Supply curve ■ Slopes upward; as a reward for saving increases, quantity of savings available for lending increases ○ Government policies ■ Can affect the economy’s saving and investment ● Saving incentives ● Investment incentives ● Government budget deficits and surpluses Policy 1: Saving Incentives ○ Shelter some saving from taxation ■ Affects supply of loanable funds ■ Increase in supply ● Supply curve shifts right ■ New equilibrium ● Lower interest rate ● Higher quantity of loanable funds ● Greater investment Policy 2: Investment Incentives ○ Investment tax credit ■ Affects demand for loanable funds ■ Increases demand for loanable funds ● Demand curve shifts right ■ New equilibrium ● Higher interest rate ● Higher quantity of loanable funds ● Greater saving Policy 3: Budget Deficit/Surplus ○ Government starts with balanced budget ■ Then increases government spending or cuts taxes, starts running a budget deficit. This reduces national saving. ● Changes supply of loanable funds ● Decreases supply ○ Supply curve shifts left ● New equilibrium ● ○ Higher interest rate ○ Smaller quantity of loanable funds Policy 3: Budget Deficit/Surplus ○ Crowding out ■ Decrease in investment that results from government borrowing • ○ Government budget deficit ■ Reduces supply of loanable funds ■ Interest rate rises ■ Investment falls ■ “Crowding out” results ○ Government budget surplus ■ Increases national saving and supply of loanable funds ■ Reduces interest rate ■ Stimulates investment Chapter 15:Unemployment ● Identifying Unemployment ○ Employed – ■ Those who worked ● as paid employees ● in their own business ● as unpaid workers in a family member’s business ■ Both full-time and part-time workers are considered employed ■ Those temporarily absent from work, due to vacation, illness or bad weather, are also considered to be employed ○ Unemployed ■ Those who were not employed, but were ● available for work, and tried to find employment during the previous four weeks; ● those previously laid off who are waiting to be recalled to a job.那 些之前被解雇的人正在等待被召回工作 ○ Not in the labor force ■ not employed and not unemployed, including: ■ full-time students ■ homemakers ■ Retirees ■ discouraged workers ○ Labor force ■ Total number of workers, employed and unemployed = number of employed + number of unemployed ○ Unemployment rate ■ Percentage of labor force that is unemployed Unemployment rate= (Number of unemployed/ Labor force)x100 ● ● ● ● ● ● ● ● ● ● ● Natural rate of unemployment ○ Normal rate of unemployment around which the unemployment rate fluctuates ○ estimated by Congressional Budget Office (CBO) ○ Cyclical unemployment represents the deviation of unemployment from its natural rate Labor-force participation rate ○ Percentage of the total adult population that is in the labor force ○ Percentage of the total adult population that has chosen to participate in the labor market ○ Labor - force participation rate=(Labor force/Adult population)×100 Official unemployment rate ○ Useful but imperfect measure of joblessness Movements into and out of the labor force are common ○ More than one-third of unemployed are recent entrants into the labor force Unemployment ○ Not all unemployment ends with the job seeker finding a job ■ Half of all spells of unemployment end when the unemployed leaves the labor force Some of those who report being unemployed ○ May not be trying very hard to find a job ■ May just want to qualify for a government help ■ May be working but paid “under the table” Some of those who are out of labor force ○ May want to work ■ Discouraged workers Discouraged workers ○ Would like to work but have given up looking for a job How long are the unemployed without work? ○ Most spells of unemployment are short; most people who become unemployed will soon find jobs ○ Most observed unemployment at any given time is long-term ○ Most spells of unemployment are short, but most unemployment observed at any given time is long-term. ○ Most of the economy’s unemployment problem is attributable to the relatively few workers who are jobless for long periods of time Unemployment rate ○ never falls to zero ○ fluctuates around the natural rate of unemployment Frictional unemployment ○ It takes time for workers to search for the jobs that best suit their tastes and skills. ● ○ This explains relatively short spells of unemployment Structural unemployment ○ Results when the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one ○ Explains longer spells of unemployment ○ Results when wages are set above the equilibrium, by minimum-wage laws, by collective bargaining of employers with labor unions, and by firms choosing to pay efficiency wages Job search ● Process by which workers find appropriate jobs given their tastes and skills ○ Workers differ in tastes and skills ○ Jobs differ in their attributes ○ Information about job candidates and job vacancies is disseminated slowly ● Some frictional unemployment is inevitable, due to ○ Changes in demand for labor among different firms and changes in composition of demand among industries or regions (sectoral shifts) ○ Changes in a nation’s comparative advantage ○ The economy is always changing ■ jobs continually created in some firms ■ jobs continually destroyed in other firms Public Policy and Job Search ● Policy may reduce time for unemployed to find jobs ○ If so, will reduce natural rate of unemployment ● Government programs to facilitate job search ○ Government-run employment agencies ○ Public training/retraining programs Unemployment insurance ● Government program that partially protects workers’ incomes when they become unemployed ● Increases frictional unemployment without intending to do so ● Unemployment insurance benefits are only available to the unemployed laid off because their previous employers no longer need their skills ● typically, 50% of former wages for twentysix weeks ● Reduces the hardship of unemployment ● Also changes incentives, increases the amount of unemployment ○ Unemployed ■ Devote less effort to job search ■ More likely to turn down unattractive job offers ■ Less likely to seek guarantees of job security Minimum-Wage Laws ● Structural unemployment ○ Number of jobs is insufficient ● Minimum-wage laws ○ Can cause structural unemployment ○ Force the wage to remain above the equilibrium level ■ Higher quantity of labor supplied ■ Smaller quantity of labor demanded ■ Surplus of labor = unemployment ○ Wages may be set and kept above equilibrium level by several things: – ■ Minimum-wage laws ■ Unions ■ Efficiency wages ○ If the wage is kept above the equilibrium level for any reason, unemployment results Unions & Collective Bargaining ● Union ○ Worker association that bargains with employers over wages, benefits, and working conditions ○ about 11% of U.S. workers in unions ○ type of cartel ● Collective bargaining ○ Process by which unions and firms agree on the terms of employment ● Strike ○ Organized withdrawal of labor from a firm by a union ○ Reduces employer’s production, sales, and profit ● Unionized workers ○ ...
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Nominal GDP
Real GDP

10. B – 1%

11. TRUE
13. TRUE
14. E – All the above
15. TRUE
16. B – Considerably slower
17. 35 years, 70 years
18. TRUE
19. TRUE
20. TRUE
21. TRUE
22. B – Investing in human capital
23. TRUE
24. B – Put stress on the economy’s ability to produce food, dooming humans to remain in

25. National saving, S= Investments, I
26. National saving = (𝑌 − 𝑇 − 𝐶) + (𝑇 − ...

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