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.