- Immediate action 700 billion - 1 trillion dollar bail out of the financial sector
History:
Anti-Trust Legislation:
- Spurred by a fear that monopolies would take over the economy
- Sherman Anti-Trust Act of 1890: 1911 Standard Oil dissolved
- Clayton Antitrust Act of 1914: Prohibited price discrimination and unfair business practices
The Federal Reserve System:
- Third central bank in the US
- Founded by the Federal Reserve Act of 1913
- Created to deal with the financial panic (credit crisis) of 1907
- Represented a compromise between Republicans who favored a private bank and Democrats who wanted a government bank
- Young banking system with different currencies across states, then came national banks and one currency
- Who prints the money: Today it's created by the banking system as a whole (FED isn't private but isn't totally controlled by the gov't)
Banking Act of 1935 (Glass Steagall Act):
- Created the FDIC to insure deposits at commercial banks
- Separated commercial banking from investment banking
- Separation of commercial and investment banking repealed in 1999 (Gramm-Leach-Bliliey Act)
Creation of Fannie Mae and Freddie Mac:
- Federal National Mortgage Association founded in 1938 as part of FDR's New Deal
- Designed to assist the mortgage industry by purchasing loans from financial lenders
- Encouraged an expansion in the financing for the purchase of homes
- "Privatized" in 1968 in order to remove it from the federal budget
Employment Act of 1946:
- Committed the federal government to managing economic activity through fiscal and, implicitly, monetary policy
- Requires an annual Economic Report of the President concerning the state of the economy
- Established the Council of Economic Advisors
- Created the Joint Economic Committee
Resolution Trust Corporation:
- Created in 1989 to purchase poorly performing assets from savings and loan associations
- Total cost of the bail out is estimated to be $125 billion
Equilibrium Income:
- Y = E = C + I + G (substituting C = a + bYD)
- Yields: See Keynesian Economics Power point on D2L, Slide titled "Equilibrium Income"
Graph:
- Income (output) on X axis
- Consumption (expenditures) on Y axis
- Slope = b (positive slope, as income increases so does consumption)
- Add investment and gov't spending and it shifts C up
- Add the "Keynesian Cross" (45 degree line from origin) indicates equilibrium at the point where the line and consumption cross
The Marginal Propensity to Consume and Multiplier Values:
- The multiplier varies inversely with the marginal propensity to save (1-b)
- Multiplier = 1/(1-b)
- A small change in investment causes a ripple effect downstream, and the small change is multiplied
Changes in Autonomous C, I, & G:
- Multiply the change in C, I, or G by the multiplier to get the change in national income (Delta Y)
- Offset investment fall by increasing gov't spending or increasing consumption by the same amount
- Logic is easy, if one decreases, increase another
Changes in Autonomous Taxes:
- Taxes differ from other autonomous categories in two ways: (1) taxes influence national income negatively, rising taxes reduce national income (2) Taxes reduce both savings consumption, rising taxes reduce consumption by less than the full increase in taxation
- Explicit purpose is to use gov't spending and taxes to increase national income (it doesn't matter where you spend the money, just that the money gets spent)
Fiscal Stabilization:
- Keynes believed that volatility in investment caused business cycles
- He also believed that investment changes could be offset by compensating changes in government spending and taxation
- Fiscal Stabilization is the use of changes in gov't purchases and taxes to stabilize aggregate economic activity
Figure 5-8:
- Investment falls but gov't spending rises (no tax differences) = no change in equilibrium
Introducing the International Sector:
- An economy that engages in international trade sells some of it's production overseas (exports) and consumes some production that is produced in other countries (import)
- Y = E = C + I + G + X + Z (X = exports & Y = imports)
- Increasing imports decreases GDP
- Increasing exports increases GDP
- Multiplier with International Sector: 1/(1-b+v)
- Imports cause the multiplier to be smaller and the economy is smaller
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