VWL II Vorlesungen 2022 2023, Zusammenfassungen von Wirtschaftsstrafrecht

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VWL II – 19.10.22 – Introduction and Foundations of

Macroeconomics

Measuring National INCOME

We will take Y as national income

(factor) Income of households = production of the economy

How can we measure this Y or GDP?

Gross Domestic Product: The value of all final goods produced within an

economy (country)

VWL II – 26.10.22 – Measuring GDP

1. The product method Measuring the value of all goods produced within an economy in a given time period › measuring the value-added example of a production chain › bread GVA: Gross Value Added

VWL II – 27.10.22 – Growth and the production

possibility curve

Production Possibility Curve

• Given resources are used to produce
• Two (types of) goods
• Only points (=combinations of the two goods) are efficient
• Opportunity costs: if we want more of the one good, we have to give up some of the others Growth & technological progress allows to increase the production possibilities › national income/ Welfare Change of growth rates: The BUSINESS CYCLE Theory

VWL II – 03.11.22 – 15.1 Unemployment

15.1 Unemployment

Measured using the unemployment rate = number of unemployment n of employees + n of unemployed labor force work force Question : If there are 3 million people unemployed and 24 million people employed, The rate of unemployment will be: 27 / 3 x 100 = 11, Answer : 11.1 %

Question : Suppose that the CPI in a country increases from 150 to 153 over a period of a year. What is the rate of inflation? Answer : 2% Causes of inflation: › Expectations What are the reasons of today’s inflation? › COVID-9: supply chain disruptions › War in Ukraine: resources are getting expensive

2. Price Index Average price increase taking into account the importance of the goods % of income spent for fair good. Price increase for: CPI = food x p1 + parties x p2 + clothes x p3 + rent x p 9.7 + 32.5 + 4.5 + 11. › Price kaleidoscope

VWL II – 08.11.22 – 17. Short-run Macroeconomic

Equilibrium

Background: Circular Flow “model” e.g.: past = describing the past › always in equilibrium (per definition) Theoretical model › e.g.: ante = describing general relations (also valid for future measures) › equilibrium only under certain circumstances › different actions/ strategies possible › economic policy Neo-classical Neo-liberal theory › Markets find the equilibrium (on their own) “in the long term” For example: move savings, more investments, equilibrium But this didn’t work in the 1930s/ reality in the 1930s If people fear a crisis might come  Saving is rational from an individual perspective  But not for the economy as a whole The paradox of thrift (Keynes) › Too much saving can lead to a recession › As a lack of private demand leads to a disequilibrium national income goes down The consequence can be, that there is enough supply, labor, technology. We will normally not be on this 45-degree line. The 45-degree line describes the equilibrium: AS = AD (Y or GDP production = C + I + G + NX expenditure) To understand how an equilibrium can be achieved, we have to look at the components of supply and demand: components of demand: consumption, investment, government spending. The consumption function Keynes:  People first decide what to consume  This consumption decision is based on their income C = f (y)  There is a base consumption Cautonomous  The rest is a part of my income › percentage Margin Propensity to Consume.

General idea of the Annenberg video:  Keynes had doubts about the recovery in America  Keynes Theory about Unemployment were proven correct  Americans were broken and hungry  He used deficit spending on goods and services  That brought full production and full employment Types of economic policies  Monetary policy  Fiscal policy  Supply-side policies  Microeconomic policies – tax, subsidies, price controls, housing market, regulation of monopolies  Labour market policies  Tariff/trade policies

VWL II – 16.11.22 – Exercices

MP

C

M

Example (illustrated in XL file from webpage) Caut = 1000 MPC = 0.8 equilibium: I + G = 1000 M= 5 If the government increases its spending by ΔG = 100 › ΔY= 500 › New equilibrium: Y = 10. Exercises: 2.2 Complete the following table: C = 2000 + 0.75. Y AD = C + 500 Income 0 500 2000 4000 6000 8000 10000 12000 14000 16000 Consumption 2000 2375 3500 5000 6500 8000 9500 11000 12500 14000 AD 2500 2875 4000 5500 7000 8000 10000 11500 13000 14500

Y = AD

Y = C + I + G

Y = Caut + MPC. Y + I + G Y = (I – PMC). Y = Caut + I + G Y = 5 (1000 + 1000) Y = 10.

This type of gap, where the AD line is below the 45-degree line that represents supply, we call deflationary gap as here aggregate supply AS or Y is bigger than aggregate demand AD or expenditure › prices tend to go down › deflationary. But this situation is a threat to the economy development because if people demand less than the firms produced, in the next period, the firms are going to produce less. Unemployment could be a result. People have less income › demand less › bigger gap. Download spiral: that’s the reason of the name recessionary. Which increase multiplier? A higher marginal property to consume MPS = 1 - MPC An inflationary GAP AD > AS

VWL II – 23.11.22 – 17. The Balanced Budget

Multiplier

But: How to finance these measures? There are 2 possibilities:  Higher taxes  “deficit spending” taking loans on the capital market Taxes are subtracted from the income Balance Budget Multiplier C = Caut + MPC. (Y – T) Multiplier: Effect on national income › ΔY Y = C + I + G Y = Caut + MPC. Y – MPC. T + I + G Y – MPC. Y = Caut – MPC. T + Y + G (I – MPC). Y = Caut + I + G – MPC. T Y = I. (Caut + I + G) - I. MPC. T I – MPC I – MPC Y = I. (Caut + I + G) - MPC. T I – MPC I – MPC (Government) multiplier Tax multiplier › negative Result: If the government increases its spending by ΔG financing this with additional taxes ΔT = ΔG › The national income will increase by this same amount › ΔY = ΔG (Reflected by a combined multiplier of 1) Y = Caut + MPC. Y – MPC. T + I + G ΔY = I. (Caut + I + ΔG) - I. ΔG I – MPC I – MPC With additional government spending/ balanced budget ΔG = ΔT › combined multiplier I - MPC I – MPC I – MPC = I – MPC I – MPC = 1

Example MPC = 0.8 › m = I = 5 I – MPC › MPC = 0.8 = 4 (smaller) I – MPC 0. ΔY = 5. (Caut + I + ΔG) – 4. ΔG e.g.: ΔG = 100 ΔY = 5. 100 – 4. 100 100 = 500 - 400 This theoretical result is limited by:  The result is based on the assumption that there are 3 capacities › Enough supply but inefficient demand (deflationary gap) If we reach the equilibrium, this kind of stimuli won’t work any longer  There is a (narrow) limit to increasing taxes › Consumers purchasing power goes down › Tax avoidance may occur › Country becomes less attractive for foreign investment WHAT IST MONEY? Functions of money:  Medium of exchange › Consumption spending › Private “investment” e.g.: education  Means of storing wealth › Saving › Establishing value in the future  Means of evaluation › Value of goods Types of money:  Food and goods: rice, cattle, spices, mirrors  Precious metals: gold, silver  Coins: too heavy, deposited in banks  Banknotes as holder certificates: very easy to transport Requirements: General acceptance Durability Divisibility Scarce/ limited Transportability

Reserve: Monetary Policy: how is liquidity provided to the markets Main Refinancing Instrument Why “Re-“ Finance? Commercial banks borrow money at the central bank › What is the “price” banks have to pay? The prime rate. Where do we find the current (prime) rates? › How often does that happen? The credit/money/banks creation process Video of ECB: describe ECB 100 million available and bank would offer. Bank provides a large amount of money to each other. Standing facilities don’t change, they are always there.

VWL II – 01.12.22 – 18. The Moneytary Policy

Monetary Policy (Central Banks) Decreasing the prime rate › Decreasing the interest level on the financial markets  Firms › credits are cheaper, opportunity cost of investment decrease. I >  Households › credits are cheaper, interest of savings lower. C < › Stimulating the economy › Frequently followed by an increase in the price level “inflation” due to the growth

INCREASING the prime rate (Same mechanism as above) but the other way round › Slowing down the economy › In order to reduce inflation Current dilemma of the Central Banks › Fighting inflation by increasing interest rates comes with the risk of a recession. The minimum reserve and the money multiplier When banks (MFI) lend money to private firms as people, they have to keep a percentage ( minimum reserve rate ) as “central bank money” (cash, money deposited of the central bank The current MR = 1% The MR determines the limits “credit creation” by private banks: (as money creation) › when a private bank has X€ in central bank money it can “create money” by giving loans/ credits up to a maximum of 1/ MR › money multiplier Example: a bank has central bank money of 10. M € › they can give credits of 10m. 1/1% = 1000m Simulation game:

VWL II – 14.12.22 – 18. ECB definitions of Monetary

Policy

How does the (E)CB measure how much money is in circulation › Money supply (M) Most › M0 Monetary base (cash)/ + overnight deposits (current account) = M

• Deposits with an agreed maturity = 2 years
• Deposits redeemable at a period of notice up to 3 months Less liquid › = M Repos= repurchase agreements