Macro: Exam 3 (part 2)

Spending

"Saving" is not "____"

Prcies

Higher ___ will reduce consumption; lower ____ increase consumption

wealth

Value of financial assets such as stock portfolios and retirement accounts and value of real assets (your home/car)

net worth

The best measure is ____ - value of assets

credit conditions

availability of credit and interest rates impact how much households spend (easy credit and low rates encourage consumer spending; vice versa)

current household debt level

If a household debt burden low: households may borrow to fund consumer expenditures (vice versa)

Taxes

Change disposable income (increased taxes, decrease income; vice versa)

Expectations (uncertainty)

Impacts consumer confidence that may or may not be reflected in a change in real spending (consumption)

1. Investment
2. Government spending
3. Net export

more components of GDP

Investment spending

18% of total output spending by businesses

1. New tools/equipment/machinery/factories

total output spending:

1. New capital
2. residential investment
3. changes in inventory

investment spending

business fixed investment

tools/equipment

nonresidential fixed investment

factories

75

biggest component of investment ___ %

residential investment

Newly constructed homes (25%)

changes in inventory

increases in inventory are added to GDP; decreases in inventory are subtracted from GDP (3%)

investment

___ spending is the GDP component that fluctuates the most sensitive and moody

consumer

____ spending more linked to (generally) more stable determinants

1. expectations
2. interest rates
3. technology

determinants of investment spending

interest rates

___ are prices not just one rate (higher _____ - less investment spending, vice versa)

prime rate

interest rate banks charge their best business borrowers

technology (innovation)

more efficient ways of communicating, producing, and distributing

government spending

spending done on newly produced goods and services (15-18%)

social security

What's the number one source of fed. budget?

individual income tax

What's the number one source of fed. taxes?

transfer payments

All levels of government included but ___ is not included

political arena

What and how is government spending determined?

state outlays (expenditures)

1. Education (wages/salaries/insurance) 36%
2. Public welfare (Assistance for families/children) 25%

state tax revenue

1. Sales and excise tax (sales tax levied, impose on specific taxes- ex: tobacco) 48%
2. Personal income taxes 34%

local outlay (expenditures)

1. Education (K-12) 44%
2. Welfare/Health/Hospitals 12%

local tax revenue

1. Property taxes (taxes levied on the value of real estate owned by households and businesses) 74%
2. Sales and excise 17%

government spending

Impact on GDP:

Increase

___ in government, ___ GDP (vice versa, ceteris paribus)

Increase

___ in taxes, decrease consumption through decrease in disposable income (vice versa)

exports

total value of goods and services we sell to others outside of U.S

imports

total value of goods and services we buy from others outside of U.S

net exports

final spending component

trade surplus

Xn is positive

trade deficit

Xn is negative

1. Canada
2. Mexico

Who buys our stuff?

1. China
2. Mexico

Who's stuff do we buy?

1. non-market transactions
2. underground economy
3. per-capita output

GDP issue to remember

non-market transactions

Productive activity you do for yourself or others but doesn't take place in a formal market (ex: babysitting/car maintenace)

underground economy

transactions not included in GDP (off the books, criminal activity)

per-capita output

GDP/Population

best measure

Real GDP per-capita is the ____