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.

Chapter 30: Money Growth and Inflation

The overall level of prices in an economy adjusts to bring money supply and money demand into balance. When the central bank increases the supply of money, it causes the price level to rise. Persistent growth in the quantity of money supplied leads to continuing inflation. The principle of monetary neutrality asserts that changes in the quantity of money influence nominal variables but not real variables. Most economist believe that monetary neutrality approximately describes the behavior of the economy in the long run. A government can pay for some of its spending simply by printing money. When countries rely heavily on this "inflation tax", the result is hyperinflation. One application of the principle of monetary neutrality is the Fisher effect. According to the Fisher effect, when the inflation rate rises, the nominal interest rate rises by the same amount so that the real interest rate remains the same. Many people think that inflation makes them poorer because it raises the cost of what they buy. The view is a fallacy, however, because inflation also raises nominal incomes. There are six costs of inflation. Shoeleather costs associated with reduced money holdings. Menu costs associated with more frequent adjustment of prices. Increased variability of relative prices. Unintended changes in tax liabilities due to nonindexation of the tax code. Confusion and inconvenience resulting from a changing unit of account, and arbitrary redistributions of wealth between debtors and creditors.

Chapter 29: The Monetary System

Chapter 29 is about the monetary system. This chapter introduces us to money and its functions. Money is an asset in an economy that people regularly use to buy goods from others. There are three functions of money. It is a medium of exchange so it is something that buyers give to sellers if they want to buy goods. It is also a unit of account which means it is a standard measurement for people to post prices and record debts. Lastly, it is a store of value which means that it is an item people can transfer from the present to the future. Liquidity is used to describe the ease where you can convert an asset into an economy’s medium of exchange. Money is the economy’s medium of exchange therefore, it is the most liquid asset available. Stocks and bonds are relatively liquid since they can be sold and bought easily. The FED controls the money supply primarily through open-market operations: the purchase of government bonds increase the money supply, and the sale of government bonds decreases the money supply. The FED can also expand the money supply by lowering reserve requirements or decreasing the discount rate, and it can contract the money supply by raising reserve requirements or increasing the discount rate. When banks loan out some of their deposits, they increase the quantity of money in the economy. Due to the fact that banks influence the money supply in this way, the FED's control of the money supply is imperfect.

Article Review #7: Counting The Workers The BLS Doesn’t Count

The labor force participation rate in March 2015 was about 63% percent, which is similar to 1978 conditions. Although 126,000 jobs were created that month, this was about half of what was expected. A survey by the Bureau of Labor Statistics shows a slow but steady decline in economic growth as most evident with a consistently decreasing labor force participation rate. The healthy unemployment rate of about 8% is due to this trend in labor force participation. Because less people are participating, less people are counted by the Bureau as actively unemployed. If the labor force participation rate in 2015 was similar to what it was in 2011, unemployment rate would be 11.4%. This labor force trend is due to baby boomers retiring. The most apparent demographic shift is with adult men aged 25 to 54. Which is indeed shocking to see the number of jobs added drop at such a large rate within 7 years. As of December 2015, the economy is resting on the top of the business cycle; the country is due for another recession. Fake statistics will not change this, especially due to a lack of breadwinner jobs. Currently, jobs produce less money than they did years ago; supposedly, the income from approximately 2.5 jobs now is worth 1 job from the 1960s when adjusted for inflation and continuous technological advancement. Business sales as well as business shipments are decreasing at an alarming rate.

Chapter 28: Unemployment

The unemployment rate is the percentage of those who would like to work who do not have jobs. The bureau of Labor Statistics calculates this statistic monthly based on a survey of thousands of households. The unemployment rate is an imperfect measure of joblessness. Some people who call themselves unemployed may actually not want to work, and some people who would like to work have left the labor force after an unsuccessful search and therefore are not counted as unemployed. In the U.S. economy, most people who become unemployed find work within a short period of time. Nonetheless, most unemployment observed at any given time is attributable to the few people who are unemployed for long periods of time. One reason for unemployment is the time it takes workers to search for jobs that best suit their tastes and skills. This frictional unemployment is increased as a result of unemployment insurance, a government policy designed to protect workers' incomes. A second reason our economy always has some unemployment is minimum-wage laws. By raising the wage of unskilled and inexperienced workers above the equilibrium level, minimum wage laws raise the quantity of labor supplied and reduce the quantity demanded. The surplus of labor represents unemployment. A third reason for unemployment is the market power of unions. When unions push the wages in unionized industries above the equilibrium level, they create surplus of labor.

Chapter 27: The Basic Tools of Finance

Because savings can earn interest, a sum of money today is more valuable than the same sum of money in the future. A person can compare sums from different times using the concept of present value. The present value of any future sum is the amount that would be needed today, given prevailing interest rates, to produce that future sum. Because of diminishing marginal utility, most people are risk averse. Risk-averse people can reduce risk by buying insurance, diversifying their holdings, and choosing a portfolio with lower risk and lower return. The value of an asset equals the present value of the cash flows the owner will receive. For a share of stock, these cash flows include the stream of dividends and the final sale price. According to the efficient markets hypothesis, financial markets process available information rationally, so a stock price always equals the best estimate of the value of the underlying business. Some economists question the efficient markets hypothesis, however, and believe the irrational psychological factors also influence asset prices.

Article Review #6: Newsflash From The December ‘Jobs’ Report—–The US Economy Is Dead In The Water

Similar to the recent chapter’s ideas of seasonal adjustments to account for the quarterly GPA, Stockman’s articles criticizes the use of “seasonal adjustments” in the creation of jobs during the month of December. Stockman exposes the BLS for using almost random numbers to make the economy seem to be in a stronger state than it really is. Creating a fake positive image for the current state of the economy is a worrisome tactic, and I feel like it would be better if information was not blown up to be made pretty. I feel like Stockman is a bit biased at this point. The man is always criticizing Keynesian economists, and seems to hold something negative against them. It’s helpful to see the current situation from Stockman’s point of view, but it would be better if there was an included different side of the argument. As of December 2015, the economy is resting on the top of the business cycle; the country is due for another recession. Fake statistics will not change this, especially due to a lack of breadwinner jobs. Currently, jobs produce less money than they did years ago; supposedly, the income from approximately 2.5 jobs now is worth 1 job from the 1960s when adjusted for inflation and continuous technological advancement. Business sales as well as business shipments are decreasing at an alarming rate.

Chapter 26: Saving, Investment, and the Financial System

The US financial system is made up of many types of financial institutions, such as the bond market, the stock market, banks, and mutual funds. All these institutions act to direct the resources of households that want to save some of their income into the hands of households and firms that want to borrow. National income accounting identities reveal some important relationships among macroeconomic variables. In particular, for a closed economy, national saving must equal investment. Financial institutions are the mechanism through which the economy matches one person's saving with another person's investment. The interest rate is determined by the supply and demand for loanable funds. The supply of loanable funds comes from households that want to save some of their income and lend it out. The demand for loanable funds come from households and firms that want to borrow for investment. To analyze how any policy or event affects the interest rate, one must consider how it affects the supply and demand for loanable funds. National saving equals private saving plus public saving. A government budget deficit represents negative public saving and, therefore, reduces national saving and the supply of loanable funds available to finance investment. When a government budget deficit crowds out investment, it reduces the growth of productivity and GDP.

Chapter 24: Measuring the Cost of Living

The consumer price index shows the cost of a basket of goods and services relative to the cost of the same basket in the base year. The index is used to measure the overall level of prices n the economy. The percentage change in the consumer price index measures the inflation rate. The consumer price index is an imperfect measure of the cost of living for three reasons. First, it does not take into account consumers' ability to substitute toward goods that become relatively cheaper over time. Second, it does not take into account increases in the purchasing power of the dollar due to the introduction of new goods. Third, it is distorted by unmeasured changed in the quality of goods and services. Because of these measurement problems, the CPI overstates true inflation. Like the consumer price index, the GDP deflator measures the overall level of prices in the economy. Although the two price indexes usually move together, there are important differences. The GDP deflator differs from CPI because it includes goods and services produced rather than goods and services consumed. As a result, imported goods affect consumer price index but not the GDP deflator. In addition, while the consumer price index uses a fixed basket of goods, the GDP deflator automatically changes the group of goods and services over time as the composition of GDP changes.

Chapter 23: Measuring a Nation's Income

Chapter 23 discusses GDP and income. Because every transaction has a buyer and a seller, the total expenditure in the economy must equal the total income in the economy. Gross Domestic Product measure an economy's total expenditure on newly produced goods and services and the total income earned from the production of these goods and services. More precisely, the GDP is the market value of all final goods and services produced within a country in a given period of time. GDP is divided among four components of expenditure: consumption, investment, government purchases, and net exports. Consumption includes spending on goods and services by households, with the exception of purchases of new housing. Investment includes spending on new equipment and structures, including household's purchases of new housing. Government purchases include spending on goods and services by local, state, and federal governments. Net exports equal the value of goods and services produced domestically and sold abroad, subtracted by the value of goods and services produced abroad and sold domestically. Exports - Imports = Net exports. Nominal GDP uses current prices to value the economy's production of goods and services. Real GDP uses constant base-year prices to value the economy's production of goods and services. The GDP deflator measures the level of prices in the economy.