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Chapter 18 Reflection

In this course, there has one idea that I can’t stop thinking about after reading it in the first chapter. This idea states that economic models are based on the idea that people will act rationally. Economists normally assume that people are rational. However, I find it hard to believe that most people act rationally, so I was often wondering during this course how people would actually react to economic events. I think this also lessened my trust in economists because how can they know what’s going to happen if all their theories are based on people acting rationally. Even so, I still believe that professional economists would have more training and would be able to create better models to account for a human population that isn’t rational.

The debate that I found most interesting was the debate over tax laws that encourage saving. On one hand, encouraging saving does benefit the overall economy, but I would have to agree with the other side of the debate because these policies would increase the tax burden on those who can least afford it. This would increase the wage gap and decrease the quality of life for a large portion of the U.S’s population, so I do not think tax laws should be reformed to encourage saving.

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Chapter 17 Reflection

The short run trade-off between inflation and unemployment is a negative relationship where high inflation is associated with lower unemployment and low inflation is associated with higher unemployment.

There is no trade-off in the long run because expected inflation will always adjust to changes in actual inflation, and this makes the long run inflation curve vertical at the natural rate of unemployment.

I think there is a trade-off, and I think it lasts as long as people’s expectations of inflation change. I think this is how long it will last because the cost of disinflation also depends on how quickly expectations of inflation fall.

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Chapter 16 Reflection

In response to the Covid 19 pandemic, the Federal Reserve Board added money to the money supply by cutting its target for the federal funds rate and lending almost $2.3 trillion to support households, businesses, the financial markets, and state/local government (monetary policies). By raising the money supply, the Fed hoped to shift the AD curve to the right, and this would hopefully offset the shift to the left that is caused by the decrease in consumer spending from the pandemic. I believe that this policy has been successful because the GDP has risen since the pandemic showing that the AD curve has shifted to the right.

The federal government, in response to the pandemic, gave tax breaks and increased government spending (both fiscal policies). Both of these actions would shift the AD curve to the right, and I believe this would help the effects the pandemic had on aggregate demand. However, since most people probably thought that the tex cuts were temporary, it’s effect on the AD curve would be small.

I agree with the actions taken by the Fed and the federal government because it is the most reasonable response when you look at how it would affect the economy. Based on all the economic models, it makes sense to encourage consumer spending while productivity is down. However, a risk of influencing the AD curve is making the problem of inflation worse, and making inflation worse can make interest rates larger and discourage consumer spending.

The most recent stimulus bill I could find information about was the new infrastructure law Biden passed. Even though this bill doesn’t directly affect the amount of money per person, it could shift the aggregate supply curve in the long run because it stimulates our economy’s productivity. Since it can shift the LRAS to the right, this new bill is very important to the economy.

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Chapter 15 Reflection

After both a decrease in SRAS and SRAD, the local economy might not have a significant change in the price level, but its quantity of output would be well below the natural level of output in this economy. If the level of productivity in this economy doesn’t change in the long run, the LRAS curve might shift to the left. However, if productivity goes back up, the AD curve will shift to the right and move the equilibrium back to the initial natural level of output.

I would expect the effects of the short run to last at least a couple years after the pandemic because it gives the economy multiple business cycles to right itself. After a couple of years, I believe the new long run equilibrium will be at a higher level because our labor force will be larger which increases productivity and shifts the LRAS curve to the right.

During the summer of 2021, the PCE price index increased by 5.3% which shows that the price level in the money supply model has increased. This could mean that either AD or AS has increased, but I think this was only because we weren’t restraining SRAS anymore. We were lessening restrictions that affected productivity in the economy which only affects aggregate supply. On the other hand, I do not think that AD has recovered yet.

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Chapter 14 Reflection

The article I found about the trade deficit:

https://www.cnbc.com/2021/05/04/us-trade-deficit-surges-to-new-record-shortfall-with-china-rises.html

I agree with the authors perspective in this article because his analysis matches up with concepts we learned in this chapter about government budget deficits. One of the key points of the article states that, “Surging demand for foreign-made goods is pushing the shortfall.” This suggests that imports are greater than exports right now, and a decrease in net exports is a component of a government budget deficit. A decrease in net exports (a decrease in NCO) raises the real interest rate which induces a decrease in the supply of loanable funds and an increase in the real exchange rate. All of these effects suggest a trade deficit and a government budget deficit.

A trade deficit occurs when a country’s imports are greater than their exports, and this would decrease net exports. Since net exports always equal NCO, we can use the graph of U.S. net capital outflow to see that a trade deficit would decrease net capital outflow. In other words, a trade deficit is related to a negative NCO or net capital inflow. To continue, if NCO decreases the supply curve in the foreign currency exchange graph usually decreases by the same amount. When the supply curve moves to the left, the exchange rate increases. Trade surpluses are the opposite of trade deficits. When trade deficit is related to a net capital inflow, a surplus is related to a net capital outflow. When a trade deficit induces a higher exchange rate, a trade surplus would induce a lower exchange rate.

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Chapter 13 Reflection

1. “The factors that influence NCO are different than the factors that influence NX even though they must always equal each other.”

I highlighted this particular point in the text when I read that net capital outflow must always equal net exports. The factors that influenced NCO and NX seemed to be completely different, so at the time, I found it odd that they would be equal. However, it made more sense when I read in the text that the “equation holds true because every transaction that affects one side of this equation affects the other side by exactly the same amount”.

2. “A country’s real exchange rate is a key determinant of its net exports of goods and services.”

I highlighted this section of the text because it seemed to be an important idea I would use later. The explanation they gave later was about depreciation, so I tried the same thought process with appreciation. The reasoning goes something like this: An appreciation in the US real exchange rate means that US goods have become more expensive relative to foreign goods. This change encourages consumers both at home and abroad to buy fewer US goods and more foreign goods. As a result, US imports rise and exports fall which makes net exports also fall.

3. “Imagine if all car brands were held in an equal light.”

I wrote this not in the margin in response to the example for why purchasing-power parity does not always hold. This was the second reason or the idea that even tradable goods are not always perfect substitutes when they are produced in different countries. For most people, if you asked them to think of a really good, reliable vehicle, they might mention Toyota, Porsche, or a BMW. However, consumer tastes can vary greatly, and often, this makes another car brand not the perfect substitute for other brands that you might think are better.

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Chapter 12 Reflection

The costs of inflation include shoe leather costs, menu costs, relative price variability, inflation-induced tax distortions, confusion/inconvenience, and arbitrary redistributions of wealth. It can be hard to decide which is most important, but I think the inflation-induced tax distortions would have a very negative effect because they can cause people to alter their behavior which can also lead to a less efficient use of resources. Since productivity and efficiency are major players in an economy, I think this would be the most important cost of inflation.

The costs of deflation mirror the costs of inflation, and they are a problem for debtors. This is because deflation is rarely steady or predictable, so the result is the redistribution of wealth toward creditors and away from debtors. The debtors are also often poorer, so this redistribution of wealth can be very harmful.

The FRB worries about deflation because it often arises from underlying macroeconomic difficulties. I agree because for the money supply to shrink something has to be going wrong, and deflation also leads to falling incomes and rising unemployment. Both of which are bad for the economy.

When making economic choices in my life, inflation is definitely something I would consider.

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Chapter 11 Reflection

In the overall money supply, cash (the dollar bills in my wallet) is very important. This is because it makes up a large part of the money circulating in our economy. However, the cash specifically in my wallet is not very significant because it is a very small amount.

The Federal Reserve Bank is not part of the Federal government. Rather, it was created by the Federal government to oversee our banking system and the quantity of money in our economy. The Fed is supposed to serve as an independent and nonpartisan entity under the Federal government’s supervision. Recently, they injected a huge amount into the money supply by cutting the Federal Funds Rate to almost zero.

This increase in the money supply was in response to the Covid-19 pandemic. The Fed hoped that by increasing the money supply citizens would buy more goods and services (stimulate the economy). However, this only works if we assume people only behave rationally. Not everyone goes out to buy more stuff if they have more money. Some people wait and save the money which was not the Fed’s intention.

I am slightly worried about future inflation because the money supply has increased, but in the long-run, inflation, price level, and the supply of money will balance out. This will hopefully minimize the costs of inflation.

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Chapter 10 Reflection

There will always be at least some unemployment because the economy is always changing and shifting.

An example of a public policy that affects the unemployment rate is a minimum wage law. This public policy has a negative affect because it forces the wage to remain above its equilibrium level. It raises the quantity of labor supplied and decreases the quantity of labor demanded compared to that equilibrium level which results in higher unemployment.

I think the “right” amount of unemployment is equal to the natural rate of unemployment. This rate is the amount of unemployment an economy normally experiences, so it should be an amount the country can normally experience without being harmed. If this is not the case, then the country might not last very long.

I think this was an appropriate response because this stipend would encourage workers to take a longer time looking for a new job. This would have helped slow transmission of the virus because workers weren’t jumping right back into the work force. You would expect the size of the labor force to decrease when people weren’t looking for jobs immediately. However, this would slow down productivity and negativity affect businesses because there were less workers looking for jobs.

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Chapter 9 Reflection

We save our money because we hope that it will have a greater future value than it does today with the help of compounding. Next, a firm needs to pay us something to use our “extra” money because money today is more valuable than the same amount of money in the future.

When making investments in the future, I will probably take a lower risk even though my average return will also be low. Since I will not major in economics, I would not want to take a large risk unless I was fully confident in what I was doing. Since I am not yet out of high school, I have not completely considered potential jobs/salaries when thinking about majors I am interested in, but I am in the process of doing this research. I was not considering researching how my potential majors would be affected by the strength of the economy, but now I think I will add it to the list of things I will look into.

With a biology major, I could become a physical therapist with a salary around $70,000. I’m not sure if this is right, but I’ll just go with it for now. Without a college degree, I could become a personal care aide with a salary around $25,000. This is around $45,000 less per year. Over a lifetime of work, there would end up being a very large difference in the earnings I would get for each degree, so I think that going to college is a good investment.

In regard to valuing the non-monetary aspects of my potential career, I think that there is a significant value to getting a job that you enjoy, so it just supports my answer to the previous results.

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Chapter 8 Reflection

Currently, the Federal government is running record deficits in an attempt to avert or minimize a recession or depression after the Covid-19 crisis. This government deficit should decrease the supply of loanable funds which should then increase the equilibrium interest rate and equilibrium quantity of loanable funds. However, we have not seen the interest rate increase instead it has decreased. Now, why haven’t interest rates increased? I believe it is because the behavior of consumers was greatly affected by the pandemic. When the behavior of people isn’t normal, most economic theories seem to be thrown out a figurative window.

The loanable funds market helps us define/choose which investment projects are funded each year by giving us a model similar to the supply and demand model with which we can manipulate to see how different investment projects will affect the amount saved (how demand will affect the supply).

When the demand for loanable funds rises (ROI rises), the equilibrium interest rate also rises, and vice versa when the ROI lowers. When ROI tends to be lower during a recession, the demand for money tends to be lower. During a boom, this same demand tends to be higher.

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Chapter 7 Reflection

This chapter focused on the concept that consumption is directly tied to productivity. That concept supports national subsidies in education and health because improvements in both education and health of a country’s population can increase the productivity of its workers. With more education, people can more effectively produce goods and services making them more productive, and with improved health, more people are able to work which increases the productivity of a nation. Infrastructure would also increase productivity because it allows people to get around more, perhaps work at multiple jobs, and have more opportunities to produce more goods and services. When choosing the appropriate subsidy for activities that improve productivity, I’m not sure I would have a definite method to do this task, but I think there would probably be a sweet spot in which we wouldn’t be spending too much money while spending enough to keep productivity up. This sweet spot would be somewhere along the line of the graph representing diminishing returns; somewhere before the graph stops increasing at a large rate.

The negatives associated with additional population growth include pollution, damage to natural resources, overcrowding, not enough resources to sustain that size of population, etc. The positives associated with additional population growth include increased productivity which can increase growth in GDP. Before reading about this discussion about population growth in chapter seven, I was against additional population growth. However, an interesting point was made when the book talked about how technological progress often yields ways to avoid limits natural resources might put on a growing population. For example, we used to believe that we would run out of tin and copper seventy years ago, but now that isn’t a problem because we use different substances. Technological progress made a once crucial resource not as needed.

I think that we should subsidize some patents because patents are included in proprietary technological knowledge. If the government encourages technological knowledge, it should increase productivity. On the other hand, with more patents, there could be a large increase in prices if companies have monopolies on their technological knowledge.

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Chapter 6 Reflection

I think that the problems with the CPI can be relatively serious. The first problem, substitution bias, is an issue because the index is computed using a fixed basket. This fixed amount of goods does not account for prices that do not change proportionately and cause a change in buying habits of consumers. This overstates the increase in the cost of living, and there are a lot of scenarios where this happens. Since this happens often, I think this could make a large difference between the actual CPI and a CPI that doesn’t have a fixed basket. Since the CPI is used for laws and policies regarding the economy, any errors in calculations could affect how we respond, and I think this could cause some serious issues. The other two problems also could cause similar errors in the data which causes issues for the same reason.

I think the inflation rate we face in a rural area is different than that of urban areas because we get less movement and activity than that of an urban area. In a city, things are more current and change quickly while a rural town grows slower. Often, when I go to larger towns or cities, I find myself in awe of all the new goods that I didn’t know about in the town I live in. However, based on the information given for this assignment, it seems that the CPI is based on urban households, wages, and expenditures. Maybe the inflation rate we face is the same as an urban area because the CPI is calculated based on what is happening in urban areas, not about what is happening in rural areas.

I think all the uses of CPI in the assignment are appropriate, but it shouldn’t be the only measurement policy makers use to adjust income payments, adjust other economic series for price change, or use as an economic indicator. The accuracy of the CPI is more important for uses that need to reflect the prices of goods and services bought by consumers, but for uses that are needed for production the GDP deflator might be more important. Before this class, I did not pay attention to the CPI nor use it in any way that I knew of. I might have used it indirectly though since the CPI is used to calculate inflation.

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Chapter 5 Reflection

What is the difference between Real and Nominal GDP?

Nominal GDP measures the total expenditure in the economy whereas real GDP measures this expenditure while removing the effect of price changes. When expenditures rise from one year to the next, one of two things must be happening: The economy is producing a larger output of goods and services, or the goods and services are being sold at higher prices. If the nominal GDP rises, it can be attributed to both of these things, and that makes it hard to distinguish whether or not the economy is growing. When real GDP removes the effect of price changes, it makes it easier to gauge the well-being of the economy. For example, on the Bureau of Economic Analysis’ website, it was stated that real GDP in the second quarter of 2021 rose at an annual rate of 6.7%. This data shows that our economy has grown this quarter, and we can say this with more confidence because real GDP removes the effect price changes might have on the data.

In the second quarter of 2021, the GDP is shown to be 119.160. Last year, the second quarter was at 106.178. From last year, we can see that GDP is growing, and this is important because GDP is the best measure of economic well-being of a society. Currently, Covid is probably still affecting consumption, government purchases, and net exports which all affect GDP, but it was most definitely affecting the economy more last year. Also, GDP is related to health even though it might not be a direct relationship. The more people that get sick from Covid, the more stuff people buy to help the sick heal or protect themselves from the virus. However, some goods and services were not bought for a period of time because people were protecting themselves or were sick and could not do any of these activities. Both of these scenarios affect GDP.

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Chapter 4 Reflection

I would expect the availability of Uber and Lyft to affect the prices of taxi medallions because Uber and Lyft would be considered a substitute for taxis. When I drew graphs for these two markets, the supply curve shifted to the right in the ride-sharing company graph, and the demand curve shifted to the left in the taxi graph. For ride-sharing companies, the supply curve shifted to the right because the larger number of sellers makes a larger supply, or it shifted to the right because advances in technology raise the supply of that good. For taxis, the demand curve shifted to the left because Uber/Lyft is considered a substitute for taxis, and when a good’s substitute seems more appealing to consumers, the demand for that good is reduced. The equilibrium price in each market is affected by this. For both markets, the equilibrium price is lower. However, the equilibrium quantity is higher for ride-sharing companies and lower for taxis.

When minimum wage is increased, the quantity demanded of labor is lower because employers cannot afford to pay as many employees with a higher minimum wage. However, the quantity supplied of labor is higher because more people want to work if they will earn more money. You would draw the wage floor above the equilibrium because without the wage floor employers and employees would return to a wage below minimum wage. Therefore, that amount below minimum wage is the equilibrium, so you must have the wage floor above the equilibrium to increase the minimum wage. When the minimum wage rises from $7.35 to $15, the position of the wage floor changes. However, I do not think that this change would affect my previous answer.

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Chapter 3 Reflection

The concept that surprised me the most in this chapter is the idea that a person can have the comparative advantage without having the absolute advantage. This surprised me most because if I was assigning someone a job, I would choose the person who could do the job faster or better. However, it does make sense that this person cannot do every job that they are good at, so you have to choose the person who loses the least (has a lower opportunity cost) to do the job.

I believe that international trade is good overall because it allows people/firms to consume an amount of a good or service outside of their production possibilities frontier. In the homework for this chapter, one of the problems had me calculate what two countries could gain by making a trade. Once I had figured out how to see which country had the comparative advantage for each good, I was able to see that each country (when they produced the good they had a comparative advantage in) was able to consume an amount of the good they didn’t have an advantage in outside of their production possibilities frontier. This shows that international trade can increase the quality of life for the countries involved in the trade by allowing them to have more of a good than they would by themselves.

Before reading this chapter, I didn’t really have much of an opinion about international trade. I just accepted the idea that trade can benefit everyone when it was stated to be one of principles of economics. To continue, I don’t think we can think about trade with China and trade with Wyoming in the same way. They are different because one is trade involving a different country whereas the other involves a part of the same country. However, trade with both Wyoming and China encourage specialization which we can benefit from.

A recent purchase that I made that was made primarily overseas is a case of Farber-Castell drawing pencils that were made in Indonesia and assembled in Taiwan. I’m not completely sure if there was a locally produced option because I made my purchase based on the price not based on the location where the pencils were made. If there was a locally produced option, I did not buy it because it was more expensive. Also, I defined local as something not produced overseas.

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Chapter 2 Reflection

To begin, I’d like to say that I’m not the sort of person who is interested in politics. Most of the time, I avoid it completely, so thinking of a policy-maker along with statements this person has made was something I wasn’t completely sure on how to do. I ended up looking up Bernie Sanders, and I found the press releases on his website. In a press release made on August 9, 2021, he made a positive statement when he said, “[We will] address the reality that nearly 18 million households are paying over 50 percent of their income for housing by an unprecedented investment in affordable housing”. He made a normative statement when he said, “[The $3.5 trillion Budget Resolution] will create millions of good paying jobs as we address the long-neglected needs of working families and saving the planet”.

It matters that these statements are either positive or normative because identifying the type of statement the policy-maker is making can affect how you view the statement. A positive statement is a claim about how the world is, and this usually means that the statement has been proven by facts and is more of a guarantee. On the other hand, a normative statement is a claim on how the world ought to be, and this means that the policy maker has used their values/opinions to figure out what they think should happen. This makes the statement less of a guarantee than a statement that only used facts. Knowing this can affect how you evaluate each statement.

In the table of propositions about which most economists agree, I probably would not have had any opinions about them in the past, and when I read them all in the textbook, most of them made some sense with my current understanding of economics. For example, number five stated that the U.S. should not restrict employers from outsourcing work from other countries. This makes sense because with restrictions U.S. employees would not compete with workers from other countries. Also, it allows our workers to specialize in the work we do best just like how global trade can benefit everyone (principle five). However, most of the statements were harder to understand, and I would not want to say that I agreed or disagreed with these statements without a complete understanding of them.