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.