This is the last chapter in the course.  I hope you have enjoyed the course and are saddened to see it end.  What concepts or theories did you find most interesting and/or useful?  Is there an area where you changed your thinking?

The theories I found most interesting and useful were the data of macroeconomics, and money and prices in the long run. I also enjoyed the real economy in the long run section, specifically unemployment. I think my thinking was altered during the fiscal policy section and influences on aggregate demand and supply. I enjoyed this course and found that I learned a lot that can be applied to so much of my day to day understanding of policy, and the approach of our economy.

Re this chapter:  Which debate do you consider most important and interesting?  Which side do you agree with? Why?

The debate I considered most important and interesting is “should the government fight recessions with spending hikes rather than tax cuts”? I found this interesting because we are in a recession and I feel like the decisions made by the government during this time is especially crucial. I agree with the government fighting recessions with spending hikes (and some tax cuts). I agree to restore aggregate demand to a level consistent with full employment. By increasing the money supply it increases spending. By cutting taxes slightly households have the ability to spend more.

Describe the short run trade-off between inflation and unemployment.  Why is there not a long-run trade-off?  How long do you think the short-run lasts? (Or do you believe there is a trade-off at all – many economists don’t.  Why?

There is a temporary short run trade-off between inflation and unemployment. The Phillips curve suggests that in the short-run, inflation and unemployment are inversely related; as one increases the other decreases. It is believed that unanticipated inflation, or rising rate of inflation, may reduce unemployment. Based on our text, I believe a short-run trade off between inflation lasts 2-5 years. There is no long-run trade-off between inflation and unemployment because of the classical theory of economics. It is believed that growth in the money supply is the primary determinant of inflation. In addition, monetary growth does not affect real variable such as output and employment; it alters all prices and nominal incomes proportionately. Specifically, monetary growth does not influence those factor that determine unemployment rate.

I do believe there is a trade-off at all between unemployment and inflation, but as said above only in the short term because the actions taken by the central bank pushes these to items in different directions.

How does consumer confidence interact with public policies when in a recession?  How about in a boom?  Does it make policies more effective or less effective in achieving economic stability? Why?

Consumer confidence is highly intertwined with public policies when in a recession or a boom. Desired spending by households and firms determines the overall demand for goods and services, which effects the aggregate demand. In a recession, consumers do not have high levels of confidence which effects the willingness to spend. In a boom, consumers have high levels of confidence which aides in spending. Public policies need to be implemented to create consumer confidence. The use of policy instruments to stabilize aggregate demand and, as a result, production and employment. The argument about the government becoming more involved with using policy to stabilize the government is there is too much of a lag. The lags in implementation reduce the efficiency of policy as a tool for short-run stabilization. Utilizing automatic stabilizers are changes that avoid the lag.

This chapter is all about short term fluctuations in the economy – recessions and booms.  After reading the chapter what do you think about the current US (or Colorado) economy? Is a recession coming soon? Why or why not?  Is the economy in danger of overheating? Why or why not? (This is part of why you take economics — to forecast the future.  Economists are notoriously bad at that, but it is still a useful exercise to ensure you understand what might drive changes in the economy.)

This post comes at a very interesting time in our society and the world. We are currently working through the COVID situation and the US is virtually shut down, especially Colorado. I believe we are already in a depression, not recession. The falling incomes and rising unemployment has been massive since the virus hit. Regardless of what the help the government is trying to provide families and businesses there will be closures and people and businesses that will have a very hard time coming back, if they even can. Pre-COVID I believe the economy was in danger of overheating. Especially in Colorado. The cost of housing and life was starting to become unattainable for the average person. Many people in the area were feeling the effects of inflation.

Pretend for  moment you are teaching this class and you need to write questions for an exam covering this chapter.  Write three short answer questions and give 2 answers for each — an adequate response and a very good response.  You questions should cover highlights from the chapter.  Don’t choose identification or list questions, require some analysis.  A answers are generally longish.

Question 1: What is the similarity and the difference between tariffs and import quota? How would someone analyze trade policy?

Answer A: Tariffs and import quotas are both related to trade policy. Both directly influence the quantity of goods and services that a country imports or exports. Tariffs are a tax imposed on imported goods and and import quota is a total limit on the quantity of a good produced abroad that can be sold domestically. First, you must determine which curve shifts. Second, you must the direction that the demand curve shifts. Third, make a comparison. In conclusion, policies that directly influence exports or imports do not alter net exports.

Answer B: Tariffs and import quotas are both related to trade policy. Tariffs are a tax imposed on imported goods and and import quota is a total limit on the quantity of a good produced abroad that can be sold domestically. First, you must determine which curve shifts. Second, you must the direction that the demand curve shifts. Third, make a comparison.

Question 2: Define capital flight and explain how political instability can effect this?

Answer A: Capital flight is a large and sudden reduction in the demand for assets located in a country. If a country has something happen in the political system that makes the rest of the world weary of their stability, other countries might choose to pull their money out of that country. This in turn increases the troubled countries net capital outflow and, therefore, affects the market as a whole. Due to an increase in supply, the troubled country has a depreciation of the peso. The result of the depreciation, exports become cheaper and imports more expensive, effecting the trade balance.

Answer B: Capital flight is a large and sudden reduction in the demand for assets located in a country. If a country has something happen in the political system that makes the rest of the world weary of their stability, other countries might choose to pull their money out of that country.

Question 3: What are the two markets that are connected by net capital outflow? Please respond in detail.

Answer A: The market for loanable funds, and the market for foreign-currency. The market for loanable able funds utilizes national savings, domestic investment, net capital outflow, and net exports. The market for foreign-currency aides in the exchange of domestic currency for the currency of other countries.

Answer B: The market for loanable funds and the market for foreign-currency exchange.

Post your 3 favorite margin notes from this chapter.  Why did you highlight and comment on these particular points in the text? (I know some of you don’t take notes as you read – just jot down three things that you found interesting in the chapter and why.)

1. I enjoyed the Figure 1 graph in relation to the increasing openness of the US economy from 1950-2010. I also found it interesting the desire to increase trade with multiple countries, increasing the imports and exports increased to 15%. I found this interesting because of all the trade debates that are currently going on in our political atmosphere.
2. I marked the page for nominal and real exchange rate. Nominal exchange rate is the rate at which a person can trade the currency of one country for the currency of another. Real exchange rate is the rate at which a person can trade the goods and services for one country for the goods and services of another. I needed to mark this page because for some reason I kept getting these two confused.
3. I found the purchasing-power parity and the law of one price incredibly interesting. I had not heard of this term before this class. I think it is a very interesting theory, and I enjoyed learning about these equations.

What are the costs of inflation?  Which is most important?  How about deflation?  Would that be a problem and for whom? The FRB worries more about deflation. Why? Do you agree? Why or why not?

The costs of inflation is that it effects the value of the economy’s medium of exchange, when overall price level rises the value of money falls. Inflation effects the money supply and demand. Inflation leads to higher borrowing costs. I think the most important is the effect on the money supply and demand. Deflation is the decrease in costs, or falling prices. The costs of deflation is falling price of wages, goods and services, and therefore job loses. The costs of deflation and inflation would be a problem for everyone. I agree that the FRB worries more about deflation. I think the effects on the economy is more severe. I think we have all experienced a moment that we felt like life was really expensive, especially myself living in a resort town. However, I was not as personally invested when the market crashed in 2008. I think this would have been really scary for investments, vs. being faced with a high cost. Right now there are is a lot of uncertainty with COVID 19 and the economy. I am starting to feel what a lot of people probably did back in 2008. We will see what happens.

The phrase “printing money” tends to be tossed around in discussions about the money supply.  How important is cash to the overall money supply?  In our system the Federal Reserve Board has at least some control over the money supply.  How are they related to the Federal government?

In reference to our book, money supply is the quantity of money available in the economy. The Federal Reserve is responsible for managing this money. The Fed has the power to increase or decrease the amount of cash in our money supply. Cash is one type of money supply. The Fed creates dollars and uses them to buy government bods from the public. The ten principles of economics states prices rise when the government prints too much money. In our system, the Federal Reserve Board has some control over the money supply and is related to the Federal government because it is responsible to ensure the health of the nation’s bank system.

What was the FRB’s latest change to the money supply? (This summer they targeted a .25 drop in the interest rates they watch.)  Why did they make the change they did? Do you agree it was needed to either boost or slow the economy?

Current interest rates are at 1.25%, a drop in .50% from one month ago. The reason for this change is the current issue with COVID19. This virus is effecting the world, shutting down communities, and severely effecting the stock market. I do agree this was needed but I think more change will likely happen soon as this issue continues.

Why will there always be at least some unemployment?  Give an example of a public policy that affects the unemployment rate.  Is it positive or negative? Why?  

There will always be at least some unemployment. There is a difference between a natural rate of unemployment and the deviation from that, cyclical unemployment. Minimum wage laws are an example of public policy that affects unemployment rate. Many workers earn above the minimum wage, however, the effect can be negative. This is because it can raise the quantity of labor supplied and reduce the amount of labor demanded.

In what ways do unions affect the natural rate of unemployment? How about human resource regulations, such as safety or age-based rules?  Do all of these affect the cost of hiring employees? Should the affect of a regulation on employment be considered as a part of the adoption process? Why or why not?

Unions affect the natural rate of unemployment by raising the wage above the equilibrium level, this then raises the quantity of labor supplied and reduces the quantity of labor demanded, end result is unemployment. Human resource regulations also affect the natural rate of unemployment, these polices are more costly for business and hiring. I do think that the affect of a regulation on employment should be considered as a part of the adoption process because of the cost on the business.

Have you considered the trade-off between risk and return when making an investment?  Did it change your investment? Do you expect a risk premium related to the level of risk?

Personally, I have not had much experience with making investments so I have little consideration on the trade-off between risk and return. However, my limited experience defiantly evaluates that. When my husband and I were deciding to buy a house we had the option of staying in town in a deed restricted neighborhood, or buying a home further away but with a more traditional investment. Deed restricted puts a cap on what you can sell your home for.  For us, we choose to buy out of town with the option of having a better investment. In this particular case I do not think a premium related to the level of risk applies, however, I do think this applies to many investments.

Why is the present value of a dollar more valuable than its future value?

The present value of a dollar is more valuable than its future value because of variables related to interest rates and inflation. Having the dollar now is an assurance, and the dollar in the future has some unpredictability.