Macroeconomics: Unit 4, Government Spending

CoursesMacroeconomics
LanguageEnglish Language

Transcript

00:22

public and well they regulate Right Government regulates Stop a

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subject for another video This spending and taxation though the

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governments do directly affects the economy by injecting money into

00:34

it or while sucking money out of the system The

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process of government spent here is complex It carries extremely

00:43

high volume in transactions and size and when economic weather

00:47

turns warm well the economic inputs are multiplied E sped

00:52

up made larger with a broader footprint Right hot economy

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needs lots of spending and well that can get out

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of control The technical name for these financial mosquitoes getting

01:02

horny er when the weather is hot it's called spending

01:06

multiplier When the government wants to promote economic growth it

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can inject money or liquidity in the form of making

01:13

borrowing cheap into the economy in the form of its

01:17

own space And this spending multiplies as it trickles through

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the rest of the economy Like you know government throws

01:24

a whole lot of parties and then employs lots of

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bartenders Then buy a lot of beer in a leather

01:30

alcohol And then the bartenders get rich and then they

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buy Ferraris They're something like another example Well let's say

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the government wants to increase the real GDP by now

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$10,000,000,000 small adjustment in our giant economy But well they

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may want to make that increase Well why would it

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want to target some numbered increase like this Well because

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some bean counter with a phD at a Matthew model

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that shows a more efficient economic and financial equilibrium at

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that increased level of GDP versus well what's currently in

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action Does the government have to spend $10,000,000,000 They hit

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that optimal level or uh well say the government decides

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it's time for roads and bridges and sidewalks to be

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renovated Finally up until now the huge potholes well had

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cost more to fix than they were worked But they

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get bigger and bigger so well now with time we

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gotta fix him So the government buys our contract with

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subcontractors to buy concrete and metal And when Wilson paint

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needle that potholes well it hires planners and designers and

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construction workers to do the job And well guess what

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The total expense to fix all those potholes comes out

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to $1,000,000,000 So that's it The Big G spent $1,000,000,000

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but they wanted 10,000,000,000 Is the optimal GDP growth target

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Well what happened We're a 9,000,000,000 short Yeah well we're

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not done with the story Hang on that $1,000,000,000 doesn't

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just a stagnant Once the government has spent it and

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as paid for the material in the wages of the

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labor as well the construction workers might save some of

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their salary and then spend it on a new car

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or a new house or even just use it to

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buy food and pay rent Then the grocery store employees

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and landlords getting the construction workers money while they saved

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some of their earnings and use the rest to buy

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while other goods and services Right They save it for

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about eight minutes and then spend it well The same

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money continues to circulate around the economy many times over

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so that the total increase in the value of goods

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and services bought is much greater than that initial $1,000,000,000

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Big G injection the size of the multiplier of this

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semi trickle down vision of how the economy works then

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changes in cold economies When people are scared and conservative

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and just like to save their money for the rainy

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days they know that are coming Well then the multiplier

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might only be three or four times well in hot

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economy is when people are optimistic about the future and

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they feel secure in their jobs And they feel comfy

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spending 38 1008 $183 on a new electric Tesla Well

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then that multiplier might be closer than 10 11 12

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times like that $1,000,000,000 becomes you know 33,000,000,000 Something like

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that Well since each time some of the money gets

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saved and the rest gets spent the scaling factor is

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dependent on people's marginal propensity to save or MPs write

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that down and know how to spell it And that

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gets compared to their propensity to consume or mpc marginal

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propensity consume right saving versus consuming while everyone's marginal propensity

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to save might be different Well the government can use

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the average MPs to get a rough estimate of the

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scaling factor which they calculate as one over M ps

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or set another way if the average MPs are marginal

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Propensity save were 10.1 meaning people are saving 10% of

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whatever they're gross income was well the initial injection into

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the economy then get scaled up by one over 10.1

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or by 10 a factor of 10 which means the

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big G only need spend $1,000,000,000 on I'll say infrastructure

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build instead of bartending for parties that $1,000,000,000 then would

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have a factor of 10 behind it and raise the

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GDP by yes $10,000,000,000 And we say on Lee here

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with a smirk However if the MPs are marginal propensity

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to save were 0.5 meaning people are really nervous People

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are saving half their income after taxes Well then the

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scaling factor would only be to write one over 10.5

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is too So the government would need to spend $5,000,000,000

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Teo get $10,000,000,000 in increased GDP All right so where

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does the government get the money to change their spending

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habits Well unless It has a rainy day fund a

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k A surplus from budgeting to spend less than the

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money they received through taxes Well then the government will

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just have to borrow the money from somewhere Well an

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alternative to just borrowing the money The government could decide

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Tio well more or less create inflation It could run

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the printing presses increased the money supply and well then

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the inflation risk there is that it gets out of

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hand And then if we have a hugely inflated currency

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it would totally devalue the U S dollar globally and

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well faith in the government And then that's a bad

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thing So the government is very careful about how often

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it runs the printing presses to just kind of create

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more cash and supply So it's um or less stuck

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with borrowing if it needs a lot of money today

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to kind of prime the GDP well when the government

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borrows money that money comes from the market for low

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nable funds those air things like T bills and T

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notes and other government paper The government can get money

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internationally as well or domestically from banks and lenders by

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issuing bonds just like you have to pay interest when

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you go to the bank for a loan While the

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government pays interest on these bonds however while individuals getting

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a mortgage might be asking for money on the order

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of tens or hundreds of thousands of dollars maybe millions

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The government borrows money on the order of billions or

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tens of billions of dollars And as of 2019 while

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the US national debt stood it around 22 trillion dollars

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Well since the government is such a big player in

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the bond market where the government needs to borrow money

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to fund its spending well it can raise the demand

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for low nable funds and therefore the interest rate Basically

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the biggie needing cash says instead of paying you a

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3.232% interest a year on this paper well up the

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anti and pay you 3.581% interest and then all of

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a sudden insurance companies who must buy lots of government

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paper while they all weighed in and trade their cash

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for pieces of promissory paper from the U S Government

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So when the government can increase the interest rates for

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bonds that they loan out well The demand for bonds

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probably goes up and they sell out Lots of people

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are happy to take a little more interest from the

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government because well they need the safety of Uncle Sam

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being ableto taxes citizens and guarantee that the money will

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be paid to insurance companies and old people Right Well

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when the government raises the demand and the interest rates

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on Lobel funds it triggers the crowding out effect I'II

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where the high interest rates can prevent other people from

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getting the loans they need anyway So yeah if you

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ever see this guy walking through the mall with a

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giant needle don't worry He's just looking to inject some

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money into the economy No he's not a vampire different