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Ch. 22 Reflection: The Short-Run Trade-Off Between Inflation and Unemployment   A good example of the short-run trade-off between inflation and unemployment is described as the Volcker Disinflation. Paul Volcker, chairman of the Fed was put in a tough situation at the end of the 1970s when OPEC had increased the cost of oil by reducing supply. In order to rein in inflation from 10% down to something more reasonable and plateable by the American public, Volcker had to sacrifice high unemployment in order to lower inflation. Volcker achieves this through tough monetary anti-inflation policies or contractionary policies. This was also countering the fiscal policies at the time in which the Reagan administration was increasing budget deficits which expanded aggregate demand and would normally have increased inflation. Because of the fiscal policy at the time, Volcker’s adjustment took the form of Phillips Curve, was eventually expected inflation fell and the Phillips curve shifted...

Ch. 21 Reflection: Short-Run Economic Fluctuations             Consumer confidence is important for the government to consider when enacting interest rate hikes and fiscal policies. For instance, in a recession, people tend to deplete their savings and hold onto liquid assets like cash money instead of investing. Most consumers will not choose to invest heavily in the market, in real estate, bonds, or big capital purchases until the market looks to be recovering. In a recession, there are a few things that the Fed can do to improve consumer confidence. The easiest is to lower interest rates to encourage spending and investment. The second is to use forward guidance by guaranteeing the consumer that rates will stay low. The third option is the most radical, is used less frequently and is called quantitative easing. This happened during the Great Recession when the government bought mortgages, corporate debt and “longer-term...

Ch. 20 Aggregate Demand and Aggregate Supply Reflection             The model of aggregate-demand (AD) and aggregate-supply (AS) discussed in chapter 20 is what “most economists use to explain short-run fluctuations in economic activity around its long-run trend”. There are many factors that affect the short and long run shifts in both aggregate demand and supply. The AD curve slopes downward and is affected by changes in price levels, which then effect changes in consumption, investment, government purchases, and net exports. The AS curve is vertical in the long-run and shifts based on changes in labor, capital, and natural resources. In the short-run AS slopes upward and is shifts based on changes in expected price levels. In studying both short and long-run changes to AD and AS we can both learn from past recessions and depressions in the national economy and we can predict future ones. This overall model was created af...

Ch. 19 Reflection A Macroeconomic Theory of the Open Economy Question 1: What are the two types of investment that a nation makes with its savings, and what determines which investment they choose? Answer A: A nation’s borrowers choose to either invest domestically or in foreign assets. The borrower will invest based on the current exchange rates and the buying power of the dollar. Answer B: A nation’s savings are also referred to as loanable funds. As our text explains, “Whenever a nation saves a dollar of its income, it can use that dollar to finance the purchase of domestic capital or to finance the purchase of an asset abroad”. Another term for the investment in assets abroad is net capital outflow. One determination of which investment to choose depends on the real interest rate. When real interest rates rise, domestic investments are more profitable, and the net capital outflow is reduced. As well, when real interest rates fall, foreign assets are more popular, and t...

Ch. 18 Reflection: Open Economy: Basic Concepts             Three things that I found interesting regarding Chapter 18 were, the “In the News” article, the “Case Study” about the US trade deficit and the definition and theory of purchasing-power parity. Specifically, the “In the News Article” spoke about the pros and cons to the Trans-Pacific Partnership. One particular quote stood out to me from Joseph A. Massey as former US trade negotiator. He said, “the biggest threat to jobs in the United States isn’t free-trade agreements; its domestic policy”. I found that interesting since there is so much talk about US jobs moving overseas regarding TPP. I wonder which domestic policies Massey is referring to?               As far as the “Case Study” goes, I found the opening line particularly disturbing, calling the United States, “the world’s largest debtor”. I know from a personal fin...

Ch. 16 Reflection: The Monetary System 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? Recently the FRB has been pushing up interest rates. Why?  The Federal Reserve Bank (aka the Fed), is a private corporation that acts as the central bank of the United States and is advised partly by the government through the Federal Reserve Board. The Fed can print money and add it to the US money supply by buying US treasury bonds. This is a profitable for the Fed although supposedly the Fed returns all profits to the US treasury after all expenses are paid each year, even though this sounds fishy to me. The Fed can also shrink the money supply in the US by selling the bonds it holds and keeping the cash. What complicates this more is where t...

Ch. 17 Reflection: Money Growth and Inflation What are the costs of inflation?   There are many costs of inflation. In Chapter 17 we learned about the costs of hyperinflation, making money nearly worthless, so worthless, that in places like Zimbabwe, they post signs to ask people not to use it as toilet paper and flush it down the toilet. Compared to that, the US has it pretty good, as we’ve not to experience inflation more than about 7% since I’ve been alive. There is even some research that shows that some inflation is good for the economy. One of the main takeaways from reading Chapter 17 regarding inflation was the concept of the inflation tax. The book describes this as “the revenue the government raises by creating money”. For instance, ideally, the government is able to raise all of its budgets through taxes. But in some cases, like during war and with the Wall Street bailout in 2008-2009, the government resorts to printing money and thus increasing the money supply. Wh...