Chapter 35: The Short-Run Tradeoff between Inflation and Unemployment

A short-run tradeoff exists between unemployment and inflation. This means if policymakers expand aggregate demand, they can lower unemployment at the expense of higher inflation as graphically represented by the Phillips curve. A greater aggregate demand means greater economic output and higher price level, which in turn means a lower level of unemployment. The long-run Phillips curve is vertical at the natural rate of unemployment. Monetary policy can be effective in the short run but not in the long run. In the long run, expected inflation adjusts to changes in actual inflation. Once people anticipate inflation, the only way to get unemployment below the natural rate is for actual inflation to be above the anticipated rate. In the long run, the Phillips curve is vertical because short run fluctuations always lead back to the naturate rate of unemployment, and the increases/decreases in inflation year to year. In addition, changes in nominal values (inflation/deflation) have no effects on real values, and thus, change in supply of money (inflation/deflation) cannot change unemployment in the long run. An increase in the supply of money increases aggregate demand, which raises price level, increasing inflation rate on the LR Phillips curve, but keeping quantity of output constant. in the long run.

Chapter 34: The Influence of Monetary and FiscalPolicy on Aggregate Demand

Chapter 34 examines in more detail how the government’s tools of financial policy shift the aggregate demand curve in our model. Mankiw goes over two different effects, the multiplier effect and the crowding-out effect, that help to explain the size of the shift in the AD curve in this chapter. This chapter doesn’t seem too difficult, but that might change. The multiplier effect is the additional shifts in aggregate demand that result when expansionary financial policy increase income and then increase consumer spender, as represented by the multiplier (1/1-MPC). The crowding out effect is an offset in the AD that results when government policy raises the interest rate and reduces investment spending, which causes companies to outsource their investment. The two case studies that were used in this chapter were interesting. The case against active stabilization policy is based on problems that are created by lag. There is the lag that a recession might not be recognized until it’s almost over, and even when it is recognized in time, it takes a while for Congress to take action and then we have to wait again for the actions to have an effect on the recession. Mankiw explains that it is because of this lag that it is almost impossible for the government to effectively pursue action against recessions. There are however, automatic stabilizers in place that take care of the state of the economy, such as the tax system and unemployment compensation, both of which offer a safety net when the economy goes into recession without policymakers having to take any deliberate action.

Chapter 33: Aggregate Demand and Aggregate Supply

All societies experience short-run economic fluctuations around long-run trends. These fluctuations are irregular and largely unpredictable. When recessions do occur, real GDP and other measures of income, spending, and production fall, and unemployment rises. Classical economic theory is based on the assumption that nominal variables such as the money supply and the price level do not influence real variables such as output and employment. Most economists believe that this assumption is accurate in the long run but not in the short run. Economists analyze short-run economic fluctuations using the model of aggregate demand and aggregate suppl. According to this model, the output of goods and services and the overall level of prices adjust to balance aggregate demand and aggregate supply. The aggregate-demand curve slopes downward for three reasons. The first is the wealth effect: A lower price level raises the real value of households' money holdings, which stimulates consumer spending. The second is the interest-rate effect: A lower price level reduces quantity of money households demand; as households try to convert money into interest-bearing assets, interest rates fall, which stimulates investment spending. The third is the exchange-rate effect: As a lower price level reduces interest rates, the dollar depreciates in the market for foreign-currency exchange, which stimulates net exports.

Article Review #8: Golden Age of the Central Banker

This article talked about how the "Golden Age of the Central Banker" has turned into the "Silver Age of the Central Banker" because the structure has changed. Investors used to be able to affect monetary policy, but the power has shifted from the investors to the domestic politics of nations. The article argues that this is all because of massive global debt. The writer argues that the value of US exports isn't going through the process of ups and downs. The value is going down, but the volume is staying the same. The article also talked about how the value of exports is measured in the country's respective currency, so even if the currency depreciates, the the value of the exports doesn't change much because it's not measured against other currencies. However, the writer also says that depreciating currency is the best method to keeping factories running. Some analysts even use the depreciation of currency to show more positive results. When analyzing politics, economists tend to see the national government as a corporation, which leads to some crucial errors while calculating economic activity. Governments want, first of all, to keep factories running - no matter the economic expense - and accomplish this by purposely depreciating currency. Meanwhile, this domestic focus is causing chaos internationally as countries quickly try to export in an attempt to cover gaps in their own economies. These countries rely on the lack of international cooperation to reach a Nash equilibrium that saves them at the expense of greater productivity. This political strategy manipulates everything from commodity prices to exchange rates to global trade volumes.

Chapter 32: A Macroeconomic Theory of the Open Economy

Two markets are central to the macroeconomics of open economies: the market for loanable funds and the market for foreign-currency exchange. In the market for loanable funds, the real interest rate adjusts to balance the supply of loanable funds(from national saving) and the demand for loanable funds (from domestic investment and net capital outflow). In the market for foreign currency exchange, the real exchange rate adjusts to balance the supply of dollars (from net capital outflow) and the demand for dollars (for net exports). Because net capital outflow is part of the demand for loanable funds and because it provides the supply of dollars for foreign-currency exchange, it is the variable that connects these two markets. A policy that reduces national saving, such as a government budget deficit, reduces the supply of loanable funds and drives up the interest rate. The higher interest rate reduces net capital outflow, which reduces the supply of dollars in the market for foreign-currency exchange. The dollar appreciates, and net exports fall. Although restrictive trade policies such as tariffs or quotas on imports, are sometimes advocated as a way to alter the trade balance, they do not necessarily have that effect. A trade restriction increases net exports for a given exchange rate and, therefore, increases the demand for dollars in the market for foreign-currency exchange. As a result, the dollar appreciates in value, making domestic goods more expensive relative to foreign goods. This appreciation offsets the initial impact of the trade restriction on net exports.

Chapter 31: Open-Economy Macroeconomics: Basic Concepts

Net exports are the value of domestic goods and services sold abroad (exports) minus the value of foreign goods and services sold domestically (imports). Net capital outflow is the acquisition of foreign assets by domestic residents (capital outflow) minus the acquisition of domestic assets by foreigners (capital inflow). Because every international transaction involves an exchange of an asset for a good or service, an economy's net capital outflow always equals its net exports. An economy's saving can be used either to finance investment at home or to buy assets abroad. Thus, national saving equals domestic investment plus net capital outflow. The nominal exchange rate is the relative price of the currency of two countries, and the real exchange rate is the relative price of the goods and services of two countries. When the nominal exchange rate changes so that each dollar buys more foreign currency, the dollar is said to appreciate or strengthen. When the nominal exchange rate changes so that each dollar buys less foreign currency, the dollar is said to depreciate or weaken. According to the theory of purchasing-power parity, a dollar (or a unit of any other currency) should be able to buy the same quantity of goods in all countries. This theory implies that the nominal exchange rate between the currencies of two countries should reflect the price levels in those countries. As a result, countries with relatively high inflation should have depreciating currencies, and countries with relatively low inflation should have appreciating currencies.

Article Review #8: Simple Janet——The Monetary Android With A Broken Flash Drive

Once again we examine the fine and exquisite commentary found in an article by our most dear friend David Stockman. In this article he focus on the debt that America has and how the ideas of Janet Yellen are about as intellectual as those made by the toaster in your Kitchen. The first problem involves the negative interest rate which America, like many European countries, might soon be facing. Stockman argues that the way Keynesian economics used to handle this problem will not work for today's circumstances. He relates what is going on to what we learned in chapter 29 when he says that Fed can only impact our 18 trillion dollar economy, which include injecting central bank credit into the bond market he says the aim of this would be to get business and households to borrow more and to spend more. A big part of this article is that Stockman is denying that certain policies and Zero Interest Rates will work in the United States, and that they certainly have not been working as well here as they have in the European countries, and supposedly never will. Stockman insists that household debt has only increased since the current policies have been put into effect. here has actually been negative growth in household debt since the financial crisis. Janet claims it doesn't matter that the Fed has spent years falsely inflating equity markets through liquidity injections and putting assets under risk. Any correction in stock prices and regression of credit seem to just cause economic and job growth to slow down. That has to be stopped at all costs.