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Reflection 21 1) What did you find most confusing? For me was understanding the context between indifference curves: Income Effect and Substitution Effect. Seem to me, all of it was one big-concept-circle that works. 2) What do you think about the concept of indifference curves in the context of budget constraints? My understanding of the concept of indifference curves, is that in the context of budget, the consumer is choosing one good for another based off affordability. Based off current income, the Income-Consumption Curve shows how you can afford to consume on a higher indifference as income rises. And with lower prices we can afford to buy more. 3) Does the concept of indifference curves add to your understanding of demand curves? As an example: Yes, because when the price of goods rise, people buy less. Additionally, there are two options that intermingle with the concept of indifference curves: Income Effect and Substitution Effect. "The existence of prices and income clearly leads to budget constraints." 4) Do you think about trade-offs for large purchases (i.e. a car payment versus rent/mortgage)? How about small purchases? Does timing matter (probably you aren't purchasing both a car and a house at the same time)? How does the concept of indifference curves inform your thinking about purchases? I believe timing matters, as an example: When the market was low, buying a home then, instead of renting, and our household income thankfully increased; we had to decide, stay in the county we currently live, rent, pay more for less. Or move away, from our friends and family to a different county to buy a home for more pros than cons, and at that time, the market value was cheap, affordable, a complete steal. Compared to the housing market where we currently lived in at that time. Currently, we are looking to sell and buy again, however, the market is too high. Why sell high if you must buy high too. So, we decided to wait before we buy again. My example reminds me of the choice we have between the concept of indifference curves: Income Effect and Substitution Effect. "I used to hear that idea of giving up many small purchases to make single large one is very difficult." 5) Is that because we have trouble estimating and comparing utility values between small and large purchases? I think the best answer is--money has no utility, only value. Such as, buying that first car or home, your money had value, in the one large purchase you made. Another example, giving up going out to eat for lunch few times a work week. So, I can save more money in gas. That way I am able to pay the hefty gas prices in order to go to work, home, make money to pay the necessary monthly bills each month.
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Reflection 13--- Why do marginal costs first fall and then begin to rise? (Think about productivity and how it is impacted by fixed resources.)--- When marginal cost is less than the average total cost, the average total cost falls because of low output levels. The marginal cost rises as the quantity of output produced increases (pg.250,251,252,253,254,255).--- 2. Why are marginal costs important to a firm when making decisions to increase or decrease production?--- Production Function has a part-in understanding how marginal costs are important to a firm. For example, how many workers to hire and how much output to produce. As the number of workers increases, the marginal product declines (pg.247,248).--- 3. How can you apply these cost concepts to your own life? How do they relate to opportunity costs?--- Best example, I can think of, is giving up my weekends to study and be caught up with household chores. Or giving up Thursday ladies night with my best friend for my studies. But, overall, my short-term decisions become my long-term effect. Because giving up one weekly benefit of me-time can turn into a long-term benefit/effect; completing my studies for a better future. ---
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Public Good:--- Street Lighting--- What are the costs of providing the good?--- The government steps in. Unlike a private firm, the government has no profit motive. And the government reduces the free rider problem by collecting taxes from consumers to help fund public goods.--- What are the benefits? --- Streetlights are nonexcludable because anyone can use the lighting even if they don't pay for it, and they're nonrival because they shine just as brightly regardless of how many people stand or drive under them. If another person is to enjoy the light provided, it is not used up, in the process of consumption - there is not less light - unlike in the case of all private goods. The goods that are characterized by both non-excludability and non-subtractability properties, are called, pure public goods. You could think of it this way: The government simply returns the public’s own money to them in the form of public goods.--- Is there another way to have the good provided? Did this chapter cause you to think of Public Goods differently? In what way?--- The only way I see this, is if street lighting is no longer a public good, but becomes a private good. We could consider street lighting as impure, where the free rider program doesn’t exists and then street lighting becomes a private good. --- The “free-ride” program stands out. Because if a consumer takes advantage of a public good without having to pay for it, then too many people are taking advantage of the “free-ride” program, the reasoning behind government tax regulations. Incentives to provide the public good would become obsolete and the market would fail to provide enough of the public good.--- Reference--- https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-17-public-goods#:~:text=Streetlights%20are%20another%20example%20of,stand%20or%20drive%20under%20them.--- https://www.econport.org/content/handbook/publicgoods/Intropublicgoods.html--- https://courses.lumenlearning.com/boundless-economics/chapter/public-goods/
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Reflection 10--- Negative externalities can produce negative effects on companies or organizations, their staff and their clients. The two types of negative externalities are production and consumption externalities. Meaning that companies overproduce goods or that consumers overconsume goods. Negative externalities of production, come as a product of a production, process that causes harmful effects. Negative externalities of consumption come as a product of social costs, or the cost of an affected community, being more expensive than private costs. For instance, when someone consumes something that leads to a negative effect on someone else, a negative consumption externality exists.--- For example:--- Secondhand smoke consumption--- This externality can impact anyone around a person who's smoking a cigarette. Secondhand smoke, otherwise known as passive smoke, exists any time someone who's smoking exhales into the atmosphere and adds smoke into an environment where other people may be. Passive smoke in the air can cause health issues.--- Drunk driving consumption--- This externality can affect anyone who is on the road at the same time as a drunk driver. For example, someone may consume alcohol above the amount that law enforcement and medical professionals consider safe. If this person begins driving, they may cause a traffic accident, which can lead other drivers to crash. (i.e., I also feel, passive drinking has the same affect).--- I have chosen to favor these two examples, because they are good-real-examples, of ongoing negative externalities that will always have an opportunity to implement a negative effect upon society. As for the Coase Theorem, I feel, negotiations will always continue to try and overcome the harmful affects of negative externalities. For these two negative externalities, rules and regulations have been implemented, while other regulations are just talk and not yet implemented just yet. For instance, some states have ruled, an increase in taxes when purchasing cigarettes and/or alcohol. However, talk of an effective regulation to fine those who refuse to follow the rules and choose to smoke in a non-smoking zone; people continue to get away with their choice. While people who choose to drink and drive, under the influence, get a harsher fine and/or disciplinary action are held accountable. Nowadays smoking is just as bad, besides cigarettes, there are many other choices to choose from to become inebriated. I would prefer to implement an even higher tax increase and harsher rule to help regulated both negative externalities. That way society could really see and feel the affects of these two negative externalities, making it even harder to make a choice between, “do I need that cigarette” or “a drink before I go home.” --- Reference--- https://www.indeed.com/career-advice/career-development/negative-externality-examples
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Reflection 8----- Pick a concept from the chapter and summarize it in a single word. In a paragraph, explain why the word you chose summarizes or describes the concept.----- Concept: 8-2 The Determinants of the Deadweight Loss---- One Word: Manipulation ----- Summary:---- A tax that has a deadweight loss because it induces buyers and sellers to change their behavior. The tax raises the price paid by buyers, so they consume less. And at the same time, the tax lowers the price received by sellers, so they produce less. Because of these changes in behavior, the equilibrium quantity in the market shrinks below the optimal quantity. The more responses buyers and sellers are to changes in the price, the more the equilibrium quantity shrinks. Therefore, the greater the electricity of supply and demand the larger the deadweight loss of a tax (pg158). ---- Altering the supply and demand of a good by price manipulation ---- Price control and taxes ---- For instance, ---- COVID-19, the supply and demand of goods and services (i.e., gasoline). It’s interesting, when COVID-19 hit, price for gasoline went down. Then when society had to get back to work, and get back on their feet, gasoline prices increased, including the price of essential goods and food. ----
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Reflection 7------- 1. Describe efficiency from the perspective of an economist.--- 2. Why are producer and consumer surpluses important in determining market equilibrium?--- 3. Should market efficiency always be the goal of policy setters? Why or why not? What might an alternative be?--- ____________________________________________________________________________________ There are a couple different types of efficiency, including economic efficiency, market efficiency, and operational efficiency. An economist perspective around HYPERLINK "https://www.investopedia.com/terms/e/economic_efficiency.asp"Economic efficiency refers to the optimization of resources to best serve each person in that economic state. No set threshold determines the effectiveness of an economy, but indicators include goods brought to market at the lowest possible cost and labor that provides the greatest possible output. ------ Other factors:----- Efficiency occurs when you reduce waste to produce a given number of goods or services. You can measure efficiency by dividing total output by total input. Efficiency is an important attribute because all inputs are scarce. You can measure the efficiency of your investments using the return-on-investment figure.------- Economic surplus refers to two related quantities: ------ Consumer surplus and producer surplus, the producer surplus, is the difference between the actual price of a good or service–the market price–and the lowest price a producer would be willing to accept for a good. Economic surplus is calculated by combining the surplus benefit that is experienced by both consumers and producers in an economic transaction.--------- At the market (equilibrium) price, then, a surplus is created for both parties: ---- Consumers who would have paid more only have to pay the market price, and suppliers who would have accepted less receive the market price. The extra benefit that both consumers and suppliers get in the transaction is referred to as the economic surplus.----------- On a supply and demand diagram, consumer surplus is the area (usually a triangular area) above the equilibrium price of the good and below the demand curve. The point at which a price stabilizes–so that both consumers and producers receive maximum surplus in an economy–is known as the market equilibrium.-------- Market efficiency refers to the degree to which market prices reflect all available, relevant information. If markets are efficient, then all information is already incorporated into prices, and so there is no way to "beat" the market because there are no undervalued or overvalued securities available. ------- The HYPERLINK "https://www.investopedia.com/terms/s/sarbanesoxleyact.asp" Sarbanes-Oxley Act of 2002, which required greater financial transparency for publicly traded companies, saw a decline in equity market volatility after a company released a quarterly report. It was found that HYPERLINK "https://www.investopedia.com/terms/f/financial-statements.asp" financial statements were deemed to be more credible, thus making the information more reliable and generating more confidence in the stated price of a security. People who do not believe in an efficient market point to the fact that active traders exist. If there are no opportunities to earn profits that beat the market, then there should be no incentive to become an active trader. --------- An alternative, could be the HYPERLINK "https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp" efficient market hypothesis (EMH), which states that an investor can't outperform the market, and that market anomalies should not exist because they will immediately be HYPERLINK "https://www.investopedia.com/terms/a/arbitrage.asp" arbitraged away. The efficient market hypothesis (EMH), alternatively known as the efficient market theory, is a hypothesis that states that share prices reflect all information and consistent HYPERLINK "https://www.investopedia.com/terms/a/alpha.asp" alpha generation is impossible.-------- According to the EMH, stocks always trade at their fair value on exchanges, making it impossible for investors to purchase undervalued stocks or sell stocks for inflated prices. Therefore, it should be impossible to outperform the overall market through expert stock selection or HYPERLINK "https://www.investopedia.com/terms/m/markettiming.asp" market timing, and the only way an investor can obtain higher returns is by purchasing riskier investments.-------- References ------ https://www.investopedia.com/terms/e/efficiency.asp https://www.investopedia.com/ask/answers/041715/what-difference-between-consumer-surplus-and-economic-surplus.asp https://www.investopedia.com/terms/m/marketefficiency.asp HYPERLINK "https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp" Efficient Market Hypothesis (EMH) Definition (investopedia.com)
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Reflection 3---- It's difficult to make it through a shopping trip without purchasing something that was grown, developed, or assembled in a country other than the US. Post your responses to the following questions on your blog. 1. It is certainly true that some people have lost jobs due to increases in international trade. It is also true that some people have lost jobs due to changes in technology. Should we treat those two causes differently? Why or why not? 2. How important is production efficiency to sustainability? How is trade related to efficiency? History has shown evidence that technology has been the creator of jobs than the destroyer. The World Economic Forum estimates that by 2025, technology will create at least 12 million more jobs than it destroys, a sign that in the long run, automation will be a net positive for society. How does technology increase employment? It raises the bar of efficiency, productivity, and safety which is not achievable by humans alone. Also, it will not be the first time when there will be a shift in employment due to technology. ---- On the other hand, society has shown opposition to the use of A.I. and automation technologies as well. How does technology negatively affect the workplace? Unhealthy use of workplace technology can compromise productivity--it can impair workers' physical and mental well-being. Within the past couple decades, the U.S. lost over 60 million jobs from robots, tech, and artificial intelligence and will take more jobs from hard working citizens. The World Economic Forum says there is nothing to worry about since its’ analysis anticipates the future tech-driven economy will create 97 million new jobs by 2025. ---- Productive efficiency is when you are using your limited resources to their fullest potential. When waste is at its lowest point possible, production cannot increase without adding more of those resources. Just like other economic efficiency measures, resources are central to the idea of productive efficiency. There are limited resources, in this world (or in your company), there is only so much:---- Material Energy Labor Equipment Capital Technology ---- These limited resources force us to make decisions about the quantities and types of products we make. The goal is to use our inputs efficiently to create products that best meet the needs of the people who eventually end up using them. Productive efficiency can be applied to any industry that has finite resources, which means, non-renewable and will eventually run out. Productive efficiency is not the only measurement of efficiency. There are many other productivity indexes depending on how sophisticated you want to get: data envelopment analysis, technical efficiency, Farrell measures, and others that economists love to apply to manufacturing. But they all start with the same step: having a solid data and tracking process in place. If you don’t have production-technology or systems that can track key measures of your production process, you will never be able to calculate efficiency. Productive efficiency helps you begin to evaluate how well your production process uses the resources it has. It is the gateway to bigger and better efficiency practices. If you start measuring efficiency now, it will help you:---- Minimize waste in the short run, paying dividends in the long run. Make more informed decisions about how much of which product to make when. Pinpoint your place on the PPF, scaling certain products up or down while remaining efficient. Introduces allocation efficiency into your process, considering the market in your production. Productive efficiency is a great launching pad for more sophisticated types of efficiency calculations and continuous improvement activities.---- Sustainability means meeting our own needs without compromising the ability of future generations to meet their own needs. In addition to natural resources, we also need social and economic resources. Sustainability is not just environmentalism. Embedded in most definitions of sustainability we also find concerns for social equity and economic development. Adopting sustainable practices, whether large or small, can have significant impacts in the long run. Think if every office worker in every major nation used one less staple a day by using a reusable paper clip, 120 tons of steel would be recycled in one year, per nation. ---- Improvements in production efficiency mean that countries can produce more goods and services with the same number of resources. To achieve production efficiency-improvements, resources, must be shifted between industries within the economy. This means that some industries must expand while others contract. Exactly which industries expand, and contract will depend on the underlying stimulus or basis for trade. The main sources of support for free trade are the positive production and consumption efficiency effects that arise in numerous models when countries trade freely.---- References https://limblecmms.com/blog/productive-efficiency/#PE-on-the-curve https://www.mcgill.ca/sustainability/files/sustainability/what-is-sustainability.pdf https://saylordotorg.github.io/text_international-trade-theory-and-policy/s14-02-economic-efficiency-effects-of.html#:~:text=In%20every%20model%20of%20trade,from%20autarky%20to%20free%20trade.&text=Each%20of%20these%20models%20shows,a%20result%20of%20free%20trade. https://timesofindia.indiatimes.com/readersblog/thedailyyou/impact-of-technology-on-jobs-34778/ https://hbr.org/2021/11/automation-doesnt-just-create-or-destroy-jobs-it-transforms-them https://www2.deloitte.com/us/en/insights/focus/behavioral-economics/negative-impact-technology-business.html https://www.forbes.com/sites/jackkelly/2020/10/27/us-lost-over-60-million-jobs-now-robots-tech-and-artificial-intelligence-will-take-millions-more/
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Reflection 2-- How does the use of a very simplified model of the economy such as those found in a production possibilities frontier help you to understand the economy?-- The Ten Principles of Economics, in Chapter 1, defines trade-offs and opportunity costs as part of The Production Possibilities Frontier. The (PPF) is a crucial role in economics. The (PPF) is used to demonstrate the point that any nations economy reaches its greatest level of efficiency, when it produces only what it is best qualified to produce. For instance, graph of (PPF) figure 2, pg. 22, shows the trade-off between outputs of different goods at a given time, but the trade-off can change over time, when the PPF is bowed outward. Each economy must decide what combination of goods and services should be produced to attain maximum resource efficiency (pg. 22,23,24)-- 2. The buy local movement is fairly strong in Colorado. How can you think about it in terms of the PPF? How do his arguments relate to economic efficiency?-- My perception of the video above, is the need to have a farmers market every Sunday, and the concept of productive efficiency. Practically, every week or more, no matter how great of technology-conveniences we have today; there is a great deal of time, money, and stress added to produce more of one good and the decreasing-quantity of another good that is produced locally. 3. Give an example of a positive or normative statement about the economy. Why does it matter which it is? (If you happen to have a favorite example of a politician or political candidate confusing the two include it here. :^))-- Positive Statements: Statements which are objective and are based on facts.-- “A bad coffee harvest will give rise to coffee prices and people will drink more tea, is also an example of positive economic statement.-- Normative Statements: Statements which are subjective rather than objective and it deals with values.-- To reduce poverty, government should increase the minimum wage to $10 per hour” is an example of normative economic statement because possible actions are recommended in this statement.-- Reference-- https://www.investopedia.com/terms/p/productionpossibilityfrontier.asp HYPERLINK “https://www.uniassignment.com/essay-samples/economics/positive-vs-normative-statements-examples-economics-essay.php#:~:text=The%20statement%20%E2%80%98the%20unemployment%20rate%20is%20currently%20at,example%20of%20positive%20economic%20statement.%20%28Beggs%29%20Normative%20Statements"Positive Vs Normative Statements Examples Economics Essay (uniassignment.com)
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Reflection 1
1. What in this chapter made you think about an economic concept differently than your previous beliefs?
2. What new questions do you have now about the US economy based on this chapter?
3. If you already took Macroeconomics, what is your strongest memory from the material you covered in that class?
From taking macroeconomics last fall 2021, there was a one concept that stood out from chapter 1, and that was "Adam Smith and the Invisible Hand." Recapping on chapter 1 today in 2022, has brought about a "light-bulb moment,” regarding current issues and similarities with today's economic market. For instance, market failure, externalities, and market power. My perception of these three concepts, their definition, intertwines-corresponding with what the United States and other nations are having to deal with because of current stresses from the COVID-19 outbreak.
I am curious to see how this year 2022, will pan-out. Last fall, I recall learning about appropriate monetary and fiscal policies in Reflection 16; the importance of maintaining a strong fiscal foundation. This was my second “light-bulb moment.” Having a strong fiscal foundation; “creates a foundation that supports powerful factors that can create a more favorable and thriving economy.” These factors are:
+ Low interest rates + Access to capital + More private investments
+ Confidence + Public investments + Safety net
All six factors can help with job growth, entrepreneurship, increase economic activity, investing into our future.
Fortunately, policymakers have the control, control over our fiscal! Unfortunately, if our fiscal foundation is not taken care of carefully the complete opposite economic activity can happen. Such as, the effects of Covid-19 outbreak and the impact this outbreak has brought upon the world. I feel, policymakers have one big contradiction bestowed…upon them.
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Reflection 18 What concepts or theories did you find most interesting and/or useful? Is there an area where you changed your thinking? Overall, I started this class blindly, not knowing much of the basics of macroeconomics. In the beginning I found Adam Smith’s Invisible Hand interesting, at the end of the semester, a light bulb happened! I’ve learned to understand the significance of the fiscal and monetary policies to be very valuable. I found myself understanding and caring more about what our Federal Reserve and Federal Government are doing, considering the current events with the COVID-19 recession. Especially, since their purpose is to minimize the impact of a crisis and help promote a stable economy and financial system. Re this chapter: Which debate do you consider most important and interesting? Which side do you agree with? Why? Reading topic “Pro: The Tax Laws Be Reformed to Encourage Saving,” and “Con: The Tax Laws Should Not Be Reformed to Encourage Saving,” I found very compelled to reference. Because, like so many citizens, who may be unaware, as how the U.S. tax system works; in chapter 18-6A and 18-6B, there were few pros and cons to consider which were a bit of an eye opener and frustrating. For instance, chapter 18-6A and 18-6B, discusses international data and it shows positive correlation between national saving rates and measures of economic well-being. A nations’ saving rate; is a key determinant, of its long-run prosperity, and when the saving rate is higher, and more resources are available for investment. In truth, people respond to incentives. If a nations’ laws make saving attractive, people will save a higher fraction of their incomes, which will lead to bigger savings and more prosperous future. Such as, considering a tax advantage saving account(s); i.e., IRA, 401(k), 403(b), and profit-sharing plans. Unfortunately, the U.S. tax system discourages saving by taxing the return to saving quite heavily. The tax code can further discourage saving, by taxing forms of capital income twice. Additionally, the tax code and many other policies and institutions in our society can reduce the incentive for households to save. All this can be done by: A marginal tax rate on interest income Federal and State taxes added together Which in turn, in a longtime span, the tax rate on interest income reduces the benefit of saving. Earned profit from its capital investment; the stockholder pays taxes for a second time, in the form of individual income tax, substantially reduces the return to the stockholder. Government benefits such as Welfare and Medicaid Grant Financial Aid The problem with proposals to increase the incentive to save, is that they increase the tax burden on those who can least afford it. Policymakers must be sure to distribute the tax burden, fairly. Tax policies designed to encourage saving-may not be effective at achieving a goal: Consider national savings, the sum of private and public saving, instead of trying to alter the tax code to encourage bigger private saving; policymakers can simply raise public savings by reducing the budget deficit or by raising taxes on the wealthy. This approach offers a direct way of raising national saving and increasing prosperity for future generations. Or changing the tax code could be a catch-22 and make matters worse, a no-win situation. (pg.405,406,407)
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Reflection 17 1. Describe the short run trade-off between inflation and unemployment. Inflation and unemployment have maintained an inverse relationship, as represented by the Phillips curve. Low levels of unemployment correspond with higher inflation, while high unemployment corresponds with lower inflation and even deflation. Or if policymakers expand aggregate demand, they can lower unemployment, but only at the cost of higher inflation. If they contract aggregate demand, they can lower inflation, but at the cost of temporarily higher unemployment. 2. Why is there not a long-run trade-off? How long do you think the short-run lasts? Friedman and Phelps concluded that inflation and unemployment are unrelated in the long run. When the Federal Reserve increases the growth rate of the money supply; the rate of inflation increases. However, unemployment remains at its natural rate in the long run. Adverse changes and supply shock, in the aggregated supply, can worsen the short run trade-off between unemployment and inflation. When the Federal Reserve contracts growth in the money supply to reduce inflation; it moves the economy along the short-run Phillips curve. The result temporarily high unemployment. 3. Or do you believe there is a trade-off at all - many economists don't, why? Economists used to believe that all prices were flexible. That means if conditions change, like when a recession happens, prices will quickly adapt to that change. For example, if there is a recession, high unemployment will quickly drive down wages. Lower wages make firms more willing to hire more workers. More workers mean more output, so flexible prices (like wages) mean that recessions should mostly fix themselves. Or so the thinking was at the time! The Great Depression made us question the idea that all prices are flexible. Economists had to rethink what they thought they knew about how well prices adjust. Price adjustment might work well in the long-run, but the short-run is different altogether. This developed idea called short-run nominal price rigidity, which is just an economist’s way of saying “prices don’t adjust quickly.” --Today, most economists believe that prices are sticky (at least in the short run). Furthermore, Q1: Why is it that, expected inflation explains, why there is a trade-off between inflation, and unemployment in the short run but not in the long run? Q2: And how quickly does the short-run trade off disappear-depends on how quickly expectations adjust? References https://www.burbankusd.org/cms/lib/CA50000426/Centricity/Domain/563/35_4E%20-%20The%20Short-Run%20Trade-off%20Between%20Inflation%20and%20Unemployment.ppt#:~:text=Society%20faces%20a%20short%2Drun,cost%20of%20temporarily%20higher%20unemployment. https://www.investopedia.com/ask/answers/040715/what-happens-when-inflation-and-unemployment-are-positively-correlated.asp https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/national-income-and-price-determinations/short-run-aggregate-supply-ap/a/lesson-summary-short-run-aggregate-supply
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Reflection 16 This chapter talks about appropriate monetary and fiscal policies to affect the economy. In 2020 and spring of 2021 we watched both in action. . . 1. What have the Federal Reserve Board's actions been in their attempts to lessen the effect of Covid-19 on the economy? Monetary Policy Report submitted to the Congress on July 9, 2021, pursuant to section 2B of the Federal Reserve Act Over the first half of 2021, progress on vaccinations has led to a reopening of the economy and strong economic growth, supported by accommodative monetary and fiscal policy. However, the effects of the COVID-19 pandemic have continued to weigh on the U.S. economy, and employment has remained well below pre-pandemic levels. Shortages of material inputs and difficulties in hiring have held down activity in a number of industries. In part because of these bottlenecks and other largely transitory factors, PCE (personal consumption expenditures) prices rose 3.9 percent over the 12 months ending in May. Over the first half of the year, the Federal Open Market Committee (FOMC) held its policy rate near zero and continued to purchase Treasury securities and agency mortgage-backed securities to support the economic recovery. These measures, along with the Committee's guidance on interest rates and the Federal Reserve's balance sheet, will help ensure that monetary policy continues to deliver powerful support to the economy until the recovery is complete. Interest rate policy: To continue to support the economic recovery, the FOMC has kept the target range for the federal funds rate near zero and has maintained the monthly pace of its asset purchases. The Committee expects it will be appropriate to maintain the current target range for the federal funds rate until labor market conditions have reached levels consistent with its assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed that rate for some time. Balance sheet policy: With the federal funds rate near zero, the Federal Reserve has also continued to undertake asset purchases, increasing its holdings of Treasury securities by $80 billion per month and its holdings of agency mortgage-backed securities by $40 billion per month. These purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. The Committee expects these purchases to continue at least at this pace until substantial further progress has been made toward its maximum-employment and price-stability goals. In coming meetings, the Committee will continue to assess the economy's progress toward these goals since the Committee adopted its asset purchase guidance last December. 2. Have they been successful? Statement on Longer-Run Goals and Monetary Policy Strategy Adopted effective January 24, 2012; as amended effective January 26, 2021 Monetary policy actions tend to influence economic activity, employment, and prices with a lag. In setting monetary policy, the Committee seeks over time to mitigate shortfalls of employment from the Committee's assessment of its maximum level and deviations of inflation from its longer-run goal. Moreover, sustainably achieving maximum employment and price stability depends on a stable financial system. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee is prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. 3. How about the federal government? Have they been useful? The coronavirus (COVID-19) pandemic has caused a severe public health crisis, an economic disruption for every American. So far, lawmakers have enacted six major bills, costing about $5.3 trillion, to help manage the pandemic and mitigate the economic burden on families and businesses. Below is a recap of that legislation. THE LATEST ROUND OF LEGISLATION The American Rescue Plan, which was enacted on March 11, 2021, provides an additional $1.9 trillion of federal relief in a variety of areas. Some of the key provisions in that bill include: Direct payments to individuals ($411 billion). Payments of $1,400 will be sent to individual taxpayers earning up to $75,000 ($2,800 for married couples earning up to $150,000), plus an additional $1,400 per qualified child. The payment will phase out for incomes up to $80,000 ($160,000 for married couples). Direct aid to state, local, and tribal governments ($362 billion). The bill includes additional support to such governments to help them respond to the pandemic. Extension of unemployment benefits ($203 billion). The unemployment programs currently in place, including the additional $300 weekly unemployment benefit, will be extended through September 6, 2021. Tax incentives ($176 billion). The legislation significantly enhances existing tax credits, mostly for one year. The Child Tax Credit will increase from $2,000 per child to $3,000 ($3,600 for children under 6) and the maximum benefit for childless households under the Earned Income Tax Credit will grow from $543 to $1,502 and be extended so more individuals can claim the benefit. Other tax credits, such as the Employee Retention Credit, are also extended or enhanced. Health-specific measures ($174 billion). The new bill provides funding for vaccine distribution, COVID-19 testing, contact tracing, and other public health measures. It also includes provisions to lower healthcare premiums and expand coverage for certain workers. Educational support ($170 billion). The majority of such support is to help K-12 schools safely reopen; colleges and other higher-education institutions will also receive funding. Other Programs ($301 Billion). The legislation also includes funding for small businesses, emergency rental assistance, mortgage assistance, and relief to prevent homelessness. “You can see previous Relief Bills, by clicking on hyperlink below” https://www.pgpf.org/blog/2021/03/heres-everything-congress-has-done-to-respond-to-the-coronavirus-so-far 4. Do you agree with the actions taken by the Federal Reserve and the Federal government? Why or why not? The United States Congress, sets the monetary policy goals for the Federal Reserve--maximum employment, price stability and moderate long-term interest rates, but gave the central bank independence to achieve those goals. The Federal Reserve is accountable to the Congress and the American people and Federal Reserve leaders regularly testify and report to the Congress on how the Federal Reserve is managing monetary policy. Congress has determined the Federal Reserve can best achieve its mission without taking politics into consideration. Furthermore, I agree with the Federal Reserve and Federal government actions they have taken. However, like I have expressed in a previous discussion “Balance the Fiscal Budget,” I would like to see Congress make tougher discussions regarding monetary policy goals, the Federal Reserve to continue and maintain low interest rates, capital asset, and see more taxations on policies that would constitute as good revenue for future innovative projects; that would continue to assist and help future generations. 5. What are the risks associated with their policies? If our long-term fiscal challenges remain unaddressed, our economic environment weakens as confidence suffers, access to capital is reduced, interest costs crowd out key investments in our future, the conditions for growth deteriorate, and our nation is put at greater risk of economic crisis. If our long-term fiscal imbalance is not addressed, our future economy will be diminished, with fewer economic opportunities for individuals and families and less fiscal flexibility to respond to future crises. Rising debt threatens America’s future in a number of critical ways: Reduced Public Investment. As the federal debt mounts, the government will spend more of its budget on interest costs, increasingly crowding out public investments. Over the next 10 years, the Congressional Budget Office (CBO) estimates that interest costs will total $5.4 trillion under current law. Currently, the United States spends over $900 million per day on interest payments. As more federal resources are diverted to interest payments, there will be less available to invest in areas that are important for economic growth. Although interest rates are currently low to help the economy recover from the pandemic, we can’t expect that situation to last forever. As interest rates rise, the federal government's borrowing costs will increase markedly. Within 30 years, CBO projects that interest costs would be the largest federal spending “program” and would be more than three times what the federal government has historically spent on R&D, non-defense infrastructure, and education combined. “See Hyperlink below for a brief explanation of a fiscal outlook” Connection between Fiscal Health and Economic Strength https://youtu.be/hu0CwUweJgs 6. The Federal government passed a new stimulus bill in December. Was that important to the economy? Consolidated Appropriations Act, 2021 The Consolidated Appropriations Act, enacted on December 27, 2020, included $868 billion of federal support to help mitigate the economic impact, which is specifically directed to pandemic relief for individuals and businesses. The Consolidated Appropriations Act adds additional stimulus funds for individuals and businesses. For instance, this act has a better proposition-opportunity for businesses, because unlike the original PPP plan, the Consolidated Appropriation Act makes numerous material changes and allows businesses to utilize the funds for other proceeds for expenses, such as, operational expenditures and supplier costs if 60% of the proceeds are used towards payroll costs. Which helps businesses stay open, providing individuals employment opportunities, giving the economy a chance for a positive fiscal outcome. References https://www.federalreserve.gov/monetarypolicy/2021-07-mpr-summary.htm https://www.pgpf.org/blog/2021/03/heres-everything-congress-has-done-to-respond-to-the-coronavirus-so-far https://www.archerlaw.com/consolidated-appropriations-act-2021-signed-into-law-includes-important-covid-relief-programs-for-individuals-and-businesses/ https://www.federalreserve.gov/faqs/why-is-it-important-to-separate-federal-reserve-monetary-policy-decisions-from-political-influence.htm
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Reflection 15 Question: Spring of 2020 the world economy experienced a significant decrease in SRAS (short run aggregate supply). That was followed by a decrease in SRAD (short run aggregate demand) … What would you expect to happen in your local economy as a result of those shifts? There are few factors to consider, to name a few: Aggerated supply is most likely to happen, such as, decrease in corporate taxes on producers. Production goes up and an expected increase with inflation. Aggerated demand is most likely happen, such as, a decrease in government spending and fear of a recession. Price levels, real GDP, Unemployment Interest rates and exports, they all had the ability to increase, decrease, or remain the same. How do you expect the short run and the long run to be related? The long run is a period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all costs, whereas in the HYPERLINK "https://www.investopedia.com/terms/s/shortrun.asp" short run firms are only able to influence prices through adjustments made to production levels. How long do you expect the short run to be? The short run does not refer to a specific duration of time but rather is unique to the firm, industry or economic variable being studied. Why? The short run and the HYPERLINK "https://www.investopedia.com/terms/l/longrun.asp" long run is that in the short run, firms face both variable and fixed costs, which means that output, wages, and prices do not have full freedom to reach a new HYPERLINK "https://www.investopedia.com/terms/e/equilibrium.asp" equilibrium. Equilibrium refers to a point in which opposing forces are balanced. Will the new long run equilibrium be at a lower level? Over the long run, a firm will search for the production technology that allows it to produce the desired level of output at the lowest cost. Why or why not? The long run is associated with the LRAC curve along which a firm would minimize its cost per unit for each respective long run quantity of output. Firms examining a long run understand that they cannot alter levels of production in order to reach an HYPERLINK "https://www.investopedia.com/terms/e/equilibrium.asp" equilibrium between supply and demand. long run models may shift away from short-run equilibrium, in which HYPERLINK "https://www.investopedia.com/articles/economics/11/intro-supply-demand.asp" supply and demand react to price levels with more flexibility. Now jump to summer 2021… Where are we now? I would have to say, we are the same, still. Has SRAS shifted back out or are we still restraining it? I feel we are restraining because prices are still high and continue to rise. Goods being produced are still slim and slow to receive. Has AD recovered? I disagree and would like to suggest that a short-run shift is needed, regarding the aggerated demand. That way the equilibrium, price, and out levels will most likely change. References https://www.youtube.com/watch?v=UwAQRnpVMzI https://www.youtube.com/watch?v=MjpSKZoQDoY https://www.investopedia.com/terms/l/longrun.asp https://www.investopedia.com/terms/s/shortrun.asp https://courses.lumenlearning.com/boundless-economics/chapter/the-aggregate-demand-supply-model/
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Reflection 14 Trade Deficit and & Surplus In this equation, exports minus imports (X – M) equals net exports. When exports exceed imports, the net exports figure is positive. This indicates that a country has a trade surplus. When exports are less than imports, the net exports figure is negative. This indicates that the nation has a HYPERLINK "https://www.investopedia.com/terms/t/trade_deficit.asp" trade deficit. A trade surplus contributes to HYPERLINK "https://www.investopedia.com/terms/e/economicgrowth.asp" economic growth in a country. When there are more exports, it means that there is a high level of output from a country's factories and industrial facilities, as well as a greater number of people that are being employed in order to keep these factories in operation. When a company is exporting a high level of goods, this also equates to a flow of funds into the country, which stimulates HYPERLINK "https://www.investopedia.com/terms/c/consumer-spending.asp" consumer spending and contributes to economic growth. The U.S. trade deficit with China for 2020 was $310.8 billion-9% less than 2019's $345.2 billion deficit. The trade deficit exists because U.S. exports to China were only $124 billion, while imports from China were $435.5 billion. What causes the U.S. and China trade deficit? China produces many consumer goods at lower costs than other countries can. The trade deficit with China is caused by the country's lower costs of labor and American demand for the goods produced there. Most economists agree that China's competitive pricing is a result of two factors: A lower HYPERLINK "https://www.thebalance.com/standard-of-living-3305758" standard of living, which allows companies in China to pay lower wages to workers An HYPERLINK "https://www.thebalance.com/how-do-exchange-rates-work-3306084" exchange rate that is partially fixed to the value of the dollar China is the HYPERLINK "https://www.thebalance.com/world-s-largest-economy-3306044" world's largest economy and has the world's largest population. It must divide its production among almost 1.4 billion residents.2 This is four times the number of people in the U.S. China sits at close to $14.3 billion in gross domestic product, while the U.S.'s GDP is just over $21.4 billion.34 China has a much lower HYPERLINK "https://www.thebalance.com/gdp-per-capita-formula-u-s-compared-to-highest-and-lowest-3305848" gross domestic product per capita, which economists use to measure standard of living. In 2019, its GDP per capita was $16,804, while the U.S. figure sat at $65,298.5 High trade deficits can lead to economic hardship, place jobs and capital outside of a country, and create trade wars as countries work to balance their partnership. Trade & Exchange Rate Trade imbalances become an issue when there isn't a relatively equal amount of trade between trading partners. For example, the U.S. feels that China isn't living up to its trade obligations, and that actions need to be taken, usually resulting in a trade embargoes or tariffs that can raise the costs of imports for the offending nation. The U.S. economy is affected by the trade deficit. Jobs and capital are moved offshore, causing financial difficulties for consumers and smaller businesses. The tariffs imposed by the administration have been paid by U.S. companies, for the most part, further costing them $46 billion after losing over $1.7 trillion in stock values.9 China is also one of the leading holders of U.S. Treasuries, which it purchases to reduce the value of its currency, thus allowing it to maintain a low exchange rate with the dollar. U.S., consumers benefit from low prices, and the government and economy benefit from capital being invested into the country. A shift in trade volumes could be more directly affected by the response in the capital account to changes in the exchange rate. Related to the Exchange Rate & How Exchange rates reflect the relative prices of currencies, and changes in those rates can affect trade flows by changing export and import prices. As a result, an appreciation in the dollar relative to other currencies raises the dollar denominated prices of U.S. exports. In contrast, a depreciation in the dollar would have the opposite effect: export prices would fall and import prices would rise. Under the current system of floating exchange rates, extensive cross border capital flows, and the role of the dollar as the dominant global currency, financial transactions are a major factor affecting exchange rates and current account balances. The balance of payments is a system of off-setting accounts. Under this arrangement, a surplus or deficit in the current account is offset by an equal transaction in the capital account, which is comprised of foreign deposits in U.S. banks, foreign purchases of U.S. businesses and real estate, and foreign purchases of U.S. government and corporate debt and equities. For some analysts, the ability of the U.S. economy to finance its trade deficits through such capital inflows reduces the constraint of domestic savings. Do I agree with the authors’ perspective? Why or why not? I feel, currently in today’s market, there seems to be less exports than imports, indicating a negative outcome. For Instance, when a company is exporting a high level of goods, this also equals to a flow of funds into the country, which stimulates HYPERLINK "https://www.investopedia.com/terms/c/consumer-spending.asp" consumer spending and contributes to economic growth. Year 2020 stimulates for consumer and business spending was brief. As mentioned previously; high trade deficits can lead to economic hardship, place jobs, capital outside of a country, and create trade wars as countries work to balance their partnership. Thus, I am agreeing with the authors’ perspective, that a weaker domestic currency stimulates exports and makes imports more expensive such as what is happening in today’s economy market. References https://www.investopedia.com/ask/answers/061515/what-happens-us-dollar-during-trade-deficit.asp https://www.thebalance.com/u-s-china-trade-deficit-causes-effects-and-solutions-3306277 https://sgp.fas.org/crs/misc/IF11430.pdf ,
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Reflection 13 Post your 3 favorite margin notes from this chapter. Why did you highlight and comment on these particular points in the text? 13-3a The Basic Logic of Purchasing-Power Parity The theory of purchasing-power parity was very interesting, I was surprised after reading, that in the end, the law of one price tells us that a dollar must buy the same amount and that the currency must have the same purchasing power in all countries. The logic of the purchasing-power parity made sense because the power it has to supply and demand, reminded me of how I like to stock up on goods whenever I visit my family in Arizona a couple times a year. And how affordably convenient those goods are compared to the prices living in the mountains. Definition, the theory of purchasing-power parity is based on a principle called the law of one price. This law asserts that a good must sell for same price in all locations. Otherwise, there would be opportunities for profit left unexploited. For example, a person could buy coffee for $4 a pound in Arizona and then sell it in the mountains for $5 a pound, making a $1 profit per pound from the difference in price. This example shows the process of taking advantage of price differences for the same item in different markets, this is called arbitrage. This arbitrage opportunity would increase the demand for coffee in Arizona and increase the supply in the mountains. Making the price of coffee rise in Arizona (in response to greater demand) and fall in the mountains (in response to the greater supply). This process would continue until eventually the prices were the same in the two markets (pg.273). 13-3b Implications of Purchasing-Power Parity If the purchasing power of the dollar is always the same at home and abroad when the real exchange rate-the relative price of domestic foreign goods-cannot change. The nominal exchange rate between currencies of two countries depends on the price levels in those countries. If the equation of the purchasing power of the dollar is to be the same in two countries, then that is rearranged from: 1/p= e/p* -TO- 1= ep/p* -TO- e=p/p* The nominal exchange will equal the ratio of the foreign price level. A key implication of this theory is that nominal exchange rates change when price levels change. Because the nominal exchange rate depends on the price levels, it also depends on the money supply and demand in each country. When a central bank in any country increases the money supply and causes the price levels to rise, it also causes that country’s currency to depreciate relative to other currencies in the world. Basically, when the central bank prints large quantities of money, that money loses value, both in terms of the goods and services it can buy; in terms of the amount of other currencies it can buy (pg.273,274). My questions: before we begin, please take a moment to understand where I’m coming from. Because I don’t know where the Federal Reserve with the United States stood before COVID-19, let’s imagine that COVID-19 is or is not the culprit? Q1: Based off the implications of Purchasing-Power Parity, is this why the United States/Federal Reserve has such a coin shortage? Q2: Is it because the United States chose to pursue a more inflationary monetary policy since COVID-19 took over the world in 2020? Q3: Is this the reason why the Federal Reserve money supply has decreased and depreciated compared to other countries of the world? 13-3c Limitations of Purchasing -Power Parity “I’ve decided to break down 13-3c based off other reading that made sense to me.” As discussed in 13-3a, the basic logic of purchasing-power parity, referring to the value of money in terms of quantity of goods it can buy and that a unit of currency must have real value in every country. Arbitrage price and market differences may work eventually until prices are the same. The reason why the purchasing-power parity is not completely accurate, is that many goods are not easily traded. The purchasing-power parity does not always hold; that even, tradeable goods are not always perfect substitutes when they are produced in different countries. Because some goods not tradable and because some tradable goods are not perfect substitutes for their foreign counterparts, the purchasing power parity is not a perfect theory of exchange-rate determination. For these reasons, real exchange rates fluctuate overtime (pg.276). Q: Then why have this theory if it’s not completely accurate? Q: Why not utilized the love one price instead?
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Reflection 12 The Costs of Inflation 1. The costs associated with inflation is the uncertainty, that lead to lower levels of investment, and lower economic growth. For individuals, inflation can lead to a fall in the value of their savings and redistribute income in society from savers to lenders and those with assets. At extreme levels, inflation can destabilize society and destroy confidence in the economic system. Few examples of the costs of inflation: Reduced international competitiveness: If a country has a relatively higher inflation rate than its trading partners, then its exports will become less competitive, leading to a fall in exports and a deterioration in the UK current account. This is particularly a problem for a country in a fixed exchange rate. For example, countries in the Euro, such as Greece, Ireland and Spain experienced higher inflation than northern Eurozone, leading to record current account deficits (over 10% of GDP in 2007. The un-competitiveness also caused a fall in economic growth. However, if a country is in a floating exchange rate-then the high inflation can be offset by a depreciation in the currency. Though this still has an economic cost as it is a decline in the terms of trade and more expensive imports. Confusion and uncertainty: When inflation is high, people are more uncertain about what to spend their money on. Also, when inflation is high, firms are usually less willing to invest- because they are uncertain about future prices, profits and costs. This uncertainty and confusion can lead to lower rates of economic growth over the long term. This is one of the main concerns about high inflation rates. Countries with low and stable inflation rates-tend to have improved economic performance over countries with higher inflation. Boom and bust economic cycles: High inflationary growth is unsustainable and is usually followed by a recession. By keeping inflation low, it enables a long period of sustainable economic growth. Income redistribution: Inflation will typically make borrowers better off and lenders worse off. Inflation reduces the value of savings, especially if the savings are in the form of cash or bank account with a very low-interest rate. Inflation tends to hit older people more. Often retired people rely on the interest from savings. High inflation can reduce the real value of their saving and real incomes. The Costs of Deflation Deflation is defined as a fall in the general price level. It is a negative rate of inflation. The problem with deflation is that often it can contribute to lower economic growth. This is because deflation increases the real value of debt-and therefore reducing the spending power of firms and consumers. Also, falling prices can discourage spending as consumers delay their purchases. Deflation is not necessarily bad-especially if it is caused by increased productivity. But often periods of deflation have led to economic stagnation and high unemployment. Few examples of the costs of deflation: Discourages consumer spending: When there are falling prices, this often encourages people to delay purchases because they will be cheaper in the future. Deflation can discourage consumers from buying luxury goods / non-essential items, e.g., flatscreen TV-because you could save money by waiting for it to be cheaper. Therefore, periods of deflation often lead to lower consumer spending and lower economic growth; this, in turn, creates more deflationary pressure in the economy. Increase real value of debt: Deflation increases the real value of money and the real value of debt. Deflation makes it more difficult for debtors to pay off their debts. Therefore, consumers and firms must spend a bigger percentage of disposable income on meeting debt repayments. (in a period of deflation, firms will also be getting lower revenue, and consumers will likely get lower wages). Therefore, this leaves less money for spending and investment. This is particularly a problem in a HYPERLINK "http://econ.economicshelp.org/2011/09/balance-sheet-recession.html" balance sheet recession where firms and consumers are trying to reduce their exposure to debt. Increased real interest rates: Interest rates cannot fall below zero. If there is deflation of 2%, this means we have a real interest rate of + 2%. In other words, saving money gives a reasonable return. Therefore, deflation can contribute to an unwanted tightening of monetary policy. This is particularly a problem for Eurozone countries which don’t have recourse to any other monetary policies like quantitative easing. This is another factor that can lead to lower growth and higher unemployment. Real wage unemployment: Labor markets often exhibit sticky wages, workers resist nominal wage cuts (no one likes to see their wages cut, especially when you are used to annual pay increases. Therefore, in periods of deflation, real wages rise. This could cause HYPERLINK "https://www.economicshelp.org/blog/1507/economics/wages-and-unemployment/" real-wage unemployment. HYPERLINK "https://www.economicshelp.org/blog/1247/economics/european-unemployment-2/"Unemployment in Europe is a major problem-and low inflation is one reason. 2. Which is Most Important Would that be a problem and for Whom: HYPERLINK "https://www.economicshelp.org/wp-content/uploads/2014/05/Screen-Shot-2014-05-28-at-09.42.35.png" What I gather inflation can reduce the value of money and deflation is only good if prices fall, and your disposable income rises. It is true that some people, especially net savers, may feel better off during a period of deflation. But the problem is the wider macro-economic consequences of recession and unemployment. Five Reasons to worry about Deflation: Deflation is a generalized decline in prices and, sometimes, wages: Sure, if you’re lucky enough to get a raise, your paycheck goes further–but those whose wages decline or who are laid off or work fewer hours are not going to enjoy a falling price index. It can be hard (though, as we’ve seen, not impossible) for employers to cut nominal wages when conditions warrant; it’s easier to give raises that are less than the inflation rate, which is what economists call a real wage cut. And if wages are, as economists say, marked by “downward nominal rigidity,��� then employers will hire fewer people. As economic textbooks teach, the prospect that things will cost less tomorrow than they do today encourages people to put off buying. If enough people do that, then businesses are less likely to hire and invest, and that makes everything worse. Deflation is terrible for debtors. Prices and wages fall, but the value of your debt does not. So, you’re forced to cut spending. This applies to consumers and to governments, and it is one of the biggest issues in Europe right now. As Yale University economist Irving Fisher HYPERLINK "https://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf" wrote decades ago, debtors are likely to cut spending more than creditors increase it, and this can turn into a really bad downward spiral. Cutting interest rates below zero is very hard. Yes, one way that central bank magic works is that the Federal Reserve and the European Central Bank cut inflation-adjusted interest rates below zero when times are bad, hoping to spur borrowing, spending and investment. But it’s almost impossible for them to cut rates below zero. (Sure, there are some examples of negative interest rates, but they’re not very negative.) 3. In today’s economy inflation worries me more. Because if the cost of living does not equal to the current inflation, then I foresee more catching up on bills, depletion of hard-saved assets, and the possibility of workplace position displacement. References Economics Help HYPERLINK "https://www.economicshelp.org/macroeconomics/inflation/costs-inflation/" Costs of Inflation - Economics Help (Tejvan Pettinger, August 8. 2019) Economics Help HYPERLINK "https://www.economicshelp.org/blog/978/economics/definition-of-deflation/" Problems of deflation - Economics Help (Tejvan Pettinger, December 9. 2019) HYPERLINK "https://cliffcore.com/why-is-inflation-bad/#:~:text=Inflation%20is%20mostly%20regarded%20as%20bad%20because%20it,because%20it%20dramatically%20reduces%20the%20value%20of%20money."Why Is Inflation Bad? - Cliffcore (January 12. 2020) HYPERLINK "https://www.brookings.edu/opinions/5-reasons-to-worry-about-deflation/" 5 Reasons to Worry About Deflation (brookings.edu)(David Wessel, October 16. 2014)
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Reflection 11 How important is cash (the dollar bills in your wallet) to the overall money supply? United States, less than half of M1 is in the form of currency—much of the rest of M1 is in the form of bank accounts. Every time a dollar is deposited into a bank account, a bank’s total reserves increase; the bank will keep some of it on hand as required reserves; but it will loan the excess reserves out. When that loan is made, it increases the money supply. This is how banks “create” money and increase the money supply. When a bank makes loans out of excess reserves, the money supply increases. We can predict the maximum change in the money supply with the money multiplier. Banks can’t create an unlimited amount of money. The money multiplier determines the limit of how much money a bank can create. The money multiplier is how much the money supply will change if there is a change in the monetary base. 2. Think about the structure of the FRB. How are they related to the Federal government? Image Federal Reserve Board Image The Board of Governors--located in Washington, D.C.--is the governing body of the Federal Reserve System. It is run by seven members, or "governors," who are nominated by the President of the United States and confirmed in their positions by the U.S. Senate. The Board of Governors guides the operation of the Federal Reserve System to promote the goals and fulfill the responsibilities given to the Federal Reserve by the Federal Reserve Act. All the members of the Board serve on the HYPERLINK "https://www.federalreserve.gov/monetarypolicy/fomc.htm" FOMC, which is the body within the Federal Reserve that sets monetary policy. “Check out this video for a better learning experience. See hyperlink below.” Board of Governors of the Federal Reserve System HYPERLINK "https://www.federalreserve.gov/faqs/money_12855.htm" The Fed - What is the difference between monetary policy and fiscal policy, and how are they related? (federalreserve.gov) 3. Recently they have injected a huge amount into the money supply. How did they do that? The crisis-related special programs have expired or been closed, the Federal Reserve continues to take actions to fulfill its statutory objectives for monetary policy: maximum employment and price stability. Divided into three groups, tools, on how the Federal government was able to inject a huge amount into the money supply. The first set of tools, which are closely tied to the central bank's traditional role as the lender of last resort, involve the provision of short-term liquidity to banks and other depository institutions and other financial institutions. The traditional HYPERLINK "https://www.federalreserve.gov/monetarypolicy/bst_lendingdepository.htm" discount window falls into this category, as did the crisis-related Term Auction Facility (TAF), Primary Dealer Credit Facility (PDCF), and Term Securities Lending Facility (TSLF). Because bank funding markets are global in scope, the Federal Reserve also approved bilateral HYPERLINK "https://www.federalreserve.gov/monetarypolicy/bst_liquidityswaps.htm" currency swap agreements with several foreign central banks. The swap arrangements assist these central banks in their provision of dollar liquidity to banks in their jurisdictions. A second set of tools involved the provision of liquidity directly to borrowers and investors in key credit markets. The crisis-related Commercial Paper Funding Facility (CPFF), Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), Money Market Investor Funding Facility (MMIFF), and the Term Asset-Backed Securities Loan Facility (TALF) fall into this category. As a third set of tools, the Federal Reserve expanded its traditional tool of HYPERLINK "https://www.federalreserve.gov/monetarypolicy/bst_openmarketops.htm" open market operations to support the functioning of credit markets, put downward pressure on longer-term interest rates, and help to make broader financial conditions more accommodative through the purchase of longer-term securities for the Federal Reserve's portfolio. The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on the economy, and risks to the economic outlook remain. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. 4. What was the FRB's most recent change to the money supply and why? What is your analysis of the current policies efficacy with regards to the pandemic? Are you worried about future inflation? The Fed can influence the money supply by modifying reserve requirements, which generally refers to the amount of funds banks must hold against deposits in bank accounts. By lowering the reserve requirements, banks are able to loan more money, which increases the overall supply of money in the economy. The resulting acceleration in the supply of M1 can be understood largely as banks accommodating an increase in people's demand for money. One factor responsible for this behavior may be related to a change earlier this year to Regulation D: The Federal Reserve requires banks to hold reserves against checkable deposits. COVID-19 crisis, the federal debt, measured against the size of the economy, was more than twice what it was before the Great Recession (80 percent of GDP vs. 35 percent at the end of 2007) and larger than at any time in U.S. history except immediately after World War II. The pandemic and the federal response to it will add substantially to the debt. The federal debt at the end of fiscal year 2020 (September 30, 2020) had already reached 98 percent of GDP, and that doesn’t include the $900 billion fiscal package enacted in December 2020 or any additional COVID relief that may be enacted this year. If interest rates remain low, the government can shoulder a heavier burden of debt than if rates were higher. Yes, we are passing the bill onto future generations, but with interest rates this low, that bill is probably small. In any case, the alternative-not doing the fiscal stimulus necessary to keep the economy afloat and get it restarted after the virus recedes-would likely be worse for future generations. The huge increase in borrowing since COVID began boosts the level of the federal debt but does not have much effect on its growth over time. The decline in interest rates since the beginning of the pandemic means that net interest payments as a share of GDP are projected to be lower over the next 12 years than they were projected to be before the pandemic despite the much higher debt. Looking forward, it remains true that the federal debt is on an unsustainable path, largely because of the aging of the population (the older seasoned folks, the more spending on Social Security and Medicare), and because health care spending (much of that paid by government) is growing faster than the economy. We will have to deal with the rising federal debt eventually. References https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/ap-financial-sector/banking-and-the-expansion-of-the-money-supply-ap/a/banking-and-the-expansion-of-the-money-supply Board of Governors of the Federal Reserve System HYPERLINK "https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-system.htm" Federal Reserve Board - Structure of the Federal Reserve System Board of Governors of the Federal Reserve System HYPERLINK "https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-board.htm" Federal Reserve Board - Federal Reserve Board Board of Governors of the Federal Reserve System HYPERLINK "https://www.federalreserve.gov/monetarypolicy/bst_crisisresponse.htm" Federal Reserve Board - Crisis response https://www.federalreserve.gov/newsevents/pressreleases/monetary20210428a.htm COVID-19 Where is the US government getting all the money it’s spending in the coronavirus crisis? https://www.federalreserve.gov/newsevents/pressreleases/monetary20210428a.htm https://www.investopedia.com/ask/answers/07/central-banks.asp https://fredblog.stlouisfed.org/2021/01/whats-behind-the-recent-surge-in-the-m1-money-supply/ “There’s a nice interactive graph regarding M1 & M2 money supply, see link below” https://fredblog.stlouisfed.org/2021/01/whats-behind-the-recent-surge-in-the-m1-money-supply/
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