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[theabehernandez]

[theabehernandez]

Chapter 23 Reflection

1. I found everything in this course to be very useful because it helped me understand true economics. Thanks to the reflections, I found myself reading articles that I would’ve never encountered on my own. Coming into this course, I felt like my mind was a blank slate ready for knowledge.

2. I believe in three of the six debates discussed in this chapter. I think the economy will always be unstable, that inflation will always be a problem, and that tax incentives for saving should be catered to everyone who doesn’t make a six-figure salary. Nobody thought that in three month’s time the world would find itself amidst this horrible pandemic. To say that the warnings weren’t there is cynical and to believe that this will be over soon is imprudent. If there was no inflation people would save more and be more prepared for uncertain times like these. Low levels of inflation are inconsistent with the reality of people’s lives. They measure a small basket of goods and completely disregard essential spending groups like food, housing, education, health, and insurance. As a full-time college student who has a part-time job, I support tax incentives for saving because they can help me invest in my college education.

[theabehernandez]

Chapter 22 Reflection

1. The short-run trade-off between inflation and unemployment is characterized by the Phillips Curve. The Phillips Curve states inflation rates and unemployment rates are inversely related. This relationship holds true for every industrial country. As inflation increases, workers seek more jobs at higher wages which in turn increases the supply of labor and decreases the unemployment rate. Since the economy can never experience zero unemployment, the Phillips Curve morphs back into the natural rate of unemployment in the long-run. The Fed has estimated the natural rate of unemployment to be around 3.5%-4.5%. Short-run trade-offs usually last a few months as the supply of seasonal jobs decreases across the country.

[theabehernandez]

Chapter 21 Reflection

1. Consumer confidence is an economic indicator that measures the degree of trust and optimism of consumers in the economy. During an economic expansion, consumer confidence increases and in turn sustains economic expansion. When consumer confidence declines, less money is spent and businesses experience a cut back in sales. If consumer confidence declines to a point where businesses decrease their output, the country’s GDP will suffer and cause a recession. The CCI is the quantitative measure of consumer confidence in the U.S. It’s based on a monthly survey of 5,000 households and it’s closely followed by several government entities. People tend to talk themselves into a recession when they become uncertain of the economy. They spend less, save more, and are less risky on their investments. This creates a negative multiplier effect that ripples and causes lower growth and higher unemployment. Consumer confidence plays a vital role in the overall stability of the economy.

2. Consumer confidence may be influenced by one of several external factors like house prices, news, and inflation. When governments design policies that aim to influence consumer spending, they may prove ineffective if consumer confidence is low. For instance, a cut on interest rates might provide an incentive to spend more. However, if consumer confidence is low people will decide to save the extra income for the future. This in turn makes a cut on interest rates ineffective in boosting spending.

#​savelesspendmore

[theabehernandez]

Chapter 20 Reflection

1. I think that we’re going into a global recession that will likely last a very long time. Many experts like those at Goldman Sachs believe the economy will take about 11 years to settle and that the only reason a recession hasn’t begun is because of the worldwide pandemic. Inflationary overheating is not the priority right now but I do believe it will impact how the U.S. will recover from a recession. With that said, some economists speculate that the recession has already begun as the entire country seems to have frozen in place. The reason most of us have been alianated from the warnings that emerged since early January is because the U.S. was dealing with more important problems at the time, like the prospects of war and a potentially divisive election cycle.

2. An overheated economy occurs when inflation rates are severely high and the unemployment rate is uncommonly low. President Donald Trump has been evasive on the country’s ability to recover from this pandemic. Everyone in the U.S. has seen their bank accounts deteriorate forcing some to buy groceries with their credit cards. The only plausible solution for America’s current situation is to turn back time and make this all go away. The November elections will give everyone a sense of the future of the country when America will be in desperate need of a boost that won’t be summarized by a fiscal stimulus package.

#fakeneus

[theabehernandez]

Chapter 19 Reflection

1. Does trade policy cause trade imbalances? How does this relate to the current U.S. trade deficit?

Trade policy doesn’t affect trade imbalances because trade policy only affects bilateral trade between two countries. Although restrictive trade policies generally serve to alter the trade balance, they don’t necessarily have that effect. Trade restrictions increase net exports and therefore increase the demand for dollars in the market of foreign-currency exchange. As a result, the dollar appreciates in value which makes domestic goods more expensive relative to foreign goods. This appreciation offsets the initial impact of trade restrictions. The current U.S. trade deficit with China has been declining and the U.S. trade imbalance with the rest of the world has been growing at a much faster rate. This is due to the fact that the U.S. and other countries with a deficit invest more than they save. The only way to improve the deficit is through a combination of less investment and more private saving. An increase in private saving is a more desirable approach because it generates economic growth.

2. How have Trump administration policies affected the trade deficit?

The corporate tax cut made the U.S. a more attractive place to invest. This in turn increased foreign saving which led to an appreciation of the U.S. dollar. When people in the U.S. buy goods from another country without sending back any exports, we pay with financial assets such as stocks and bonds. In a sense, the people we purchase from have invested in the U.S. economy, this represents an inflow of foreign saving which in turn finances domestic investment here in the U.S. Additionally, tax cuts have driven up the fiscal deficit because additional money in the pockets of Americans is spent, rather than saved, on foreign goods. Even though President Trump has introduced tariffs on imports from the EU, Canada, Mexico and China, the trade deficit is still growing and this is partly due to the Federal Reserve’s interest rate policy.

3. Where does the Federal Reserve fall in relation to the current trade deficit? How does this affect the economy as a whole?

The Federal Reserve has maintained higher interest rates which in turn attract the flow of foreign capital. Higher interest rates push the power of the dollar and make American exports more expensive relative to competitors in the rest of the world. Aside from the Fed, the U.S. treasury has issued bonds that have been bought by foreign investors. This along with an expected rise in inflation has driven up domestic prices which makes foreign goods seem more affordable to consumers. Fortunately, the U.S. trade deficit is a sign of strength for the economy as a whole. It signifies the absolute dominance of the dollar in world trade and the fact that the rest of the world sees U.S. Treasuries as a safe haven. All things considered, America’s greatest export is it’s debt.

[theabehernandez]

Chapter 18 Reflection

1. One thing that I found interesting in this chapter was that trade deficits happen by a fall in saving. This was helpful because now I understand that when national saving falls, investment falls. A fall in investment affects the growth in capital stock, labor productivity, and real wages. Another great concept in this chapter was that nominal exchange rates are associated with the appreciation or depreciation of the dollar. This was helpful because now I understand that when the news mention the dollar being “strong” or “weak” I have a sense of how much money I need to send to my family in Mexico. In the past couple of weeks the dollar has been very strong and this is good because it means my grandma has more money to spend on her prescriptions, food, etc. One final point made in this chapter was that purchasing-power parity doesn’t always work. This is helpful to understand the fact that real exchange rates fluctuate over time even though changes are most often small and temporary.

[theabehernandez]

Chapter 17 Reflection

1. The costs of inflation include menu costs, shoe leather costs, loss of purchasing power, and the redistribution of wealth. The most important cost of inflation is the loss of purchasing power. Inflation causes the value of every individual dollar in the economy to decrease over time. Therefore, those who earn the same wage next year have less purchasing power as inflation increases.

2. Since 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 on time. This forces consumers and firms to allocate a larger percentage of their disposable income on meeting debt repayments. In the short run, deflation increases consumer’s purchasing powers.

3. One of the common complaints with inflation is that it’s not rising fast enough. Prices have hardly risen and most of have fallen by as mush as 19% in the case of televisions. Many critics complain that the Fed hasn’t been able to hit their annual inflation target. Since interest rates are already low, there’s an ongoing fear that the Fed won’t be able to cut rates enough to prevent a terminal recession. In the midst of all this, deflation has only affected computers and other tech products. Since deflation signifies the decline in all prices, it can also do serious economic damage. Deflation has had many negative outcomes on the economy including weak consumer spending and an increase in loan defaults. The most horrifying example of deflation was the Great Depression of the 1930s. The problem isn’t whether or not to increase inflation, but whether the Fed can hit it’s 2% inflation target in the coming year.

[theabehernandez]

Chapter 16 Reflection

1. Money supply is the quantity of money available in the economy. Cash is money supply in the form of currency. According to the Fed, money supply is equal to people’s checkings and savings accounts. The term money supply refers to all forms of wealth that can be used to purchase goods and services. The Fed controls the quantity of money that’s made available in the economy and like banks, households require cash as an immediate medium of exchange since cash is the most liquid asset in the economy.

2. The FRB is a board of governors that are selected and appointed by the president and confirmed by the Senate. The FBR’s primary tool is the open-market operation which is the purchase and sale of U.S. government bonds. If the FOMC decided to increase the money supply then the Fed would create dollars and use them to buy government bonds from the public in the nation’s bond markets.

3. There was a change in M1 from $4,046.4 in March 2, 2020 to $4,084.3 in March 9, 2020. This was a week-average change according to The Federal Reserve’s online website. I think the change provided a boost that was essentially short-lasting. My question is what happens when the rates are cut too short? I recall President Donald Trump tweeted at Jay Powell and said he had “no guts” but what essentially is the purpose of cutting the rates any lower?

[theabehernandez]

Chapter 15 Reflection

1. There is always unemployment because the economy is dynamic, therefore there is always some level of frictional and structural unemployment. The major difference between these two types of unemployment, is those who are frictionally unemployed have transferable skills in the labor market and those who are structurally unemployed are less skilled and less specialized. A public policy that directly affects the unemployment rate is unemployment insurance. This government program aims to provide laid off workers partial protection against job loss. Since most workers end up receiving half of their annual salary for a few months, they’re not motivated to continue or even begin their job search because their income is most often guaranteed. I think that a policy like this is negative because it discourages unemployed workers to look for jobs that fit their career paths. I think the duration of unemployment insurance should be decreased as to provide incentives for workers to re-enter in the labor force as soon as possible.

2. Unions affect the natural rate of unemployment because as wages rise, workers need to be laid off, demand for labor decreases, and they become outsiders. Once fired, or unemployed from the firm, these workers, among others, become part of the natural unemployment rate. Human resource regulations often, but not always, work the same way unions do. They are attentive to the opinions of the workers and they formulate policies or codes of conduct within the firm to resolve any present issues. New employees generally start off at a lower wage than the veterans of a firm. In this case, the wage is not binding unless certain regulations or unions state otherwise.

[theabehernandez]

Chapter 14 Reflection

1. To be honest, I’ve never really considered the trade-off between risk and return on investment. I think there’s always a sweet spot when it comes to risk because risk and return aren’t always equivalent outcomes in the real world. For example, I remember hearing of a guy who had a chance to invest in Snapchat early on and didn’t. When he was asked about why he chose not to, he responded by saying that he didn’t like the app because it seemed like a low risk, low return investment. Today the company, Snap Inc, is worth over $16B. I think people sometimes get lucky and end up making a really smart investment without even knowing it.

2. When the risk is high, I would expect a premium return on investment. A risk premium is a form of compensation for investors who tolerate extra risk. It’s often that only novel and riskier investment initiatives could potentially offer above-average returns. These returns are used as incentives that encourage some investors to seek riskier investments.

3. Inflation.

[theabehernandez]

Chapter 13 Reflection

1. More savings means more supply of funds that firms and households can borrow to finance their investments. If banks experienced a shortage in the supply of savings, then there would be less money to borrow and therefore less investments would be made. Private saving makes up national saving and makes it possible to finance capital such as equipment and buildings. Private savings equal the sum of household and business savings. They represent the domestic supply of loanable funds for the country. Since the federal government also borrows money from banks, budget deficits are often offset by greater private saving. Vice versa, an increase in private borrowing offsets larger budget surpluses.

2. Savings are saving the economy. Even though most Americans would prefer to use up most, if not all, of their income, myself included, it’s really important to put part of it aside in a savings account. Even though inflation negates the idea of saving, savings actually promote economic recovery. Savings in the bank act as cushions that can alleviate overwhelming expenses. Life happens and having money in the bank is always better than having a credit limit that eventually wears thin. The ability to cope through a financial hardship, by having money in the bank, keeps the economy healthy and moving toward recovery. The real question isn’t whether or not we should save part of our income, but whether or not we can live within our means.

3. Taxes decrease overall savings rates. The current tax code forces taxpayers to spend their money rather than to save it or invest it. Often any return on investment is subject to four or more layers of tax. Much like the tax code, Social Security makes it difficult for workers to save for retirement. Lower and middle-income workers have very little disposable income.

4. When the federal government borrows more money than it can pay back, it increases the budget deficit. This causes the Treasury to issue more bonds that collectively decrease in value and therefore raise the interest rate.

5. Crowding out occurs when there’s increased government borrowing. Usually the government aims to provide a service or a good that uses up financial and other resources. These resources would typically have been allocated to private enterprises for investments. The budget deficit denies the private industry a business opportunity and replaces private sector output. This drop in private investment is known as crowding out and is a negative consequence of budget deficits. Crowding out leads to higher interest rates, more bonds, that in turn offset government spending. I think crowding out can be a problem if the deficit runs too long. Short-run deficits can stimulate investments but long-run deficits can result in a less efficient use of resources. For example, if local and state governments allocate resources for the construction of public goods, such as hospitals and schools, then deficits are beneficial in the long run.

[theabehernandez]

Chapter 12 Reflection

1. Some things that can affect human productivity are work conditions, equipment, and training. For example, if workers are under bad work conditions, then their productivity will diminish because they will either feel unsafe or uncomfortable in the workplace. Having the right tools to work with makes all the difference between a job well done and a job poorly done. If an IT expert comes in ready to update the software for the system in an accounting firm and he/she doesn’t have the right cable or the proper connection on his computer, then he/she will be unable to perform his/her job and, in turn, the company will suffer. Training is, I think, one of the most important aspects corresponding to productivity because a person needs to be specialized in their field in order to not only do their jobs properly but also help others with theirs. A chef is a great example because he/she knows everything there is to know about the kitchen like how to work with knives, how to cook something at the right temperature, the correct amount of seasoning each recipe requires, etc. In turn, proper productivity is rewarded in many places with more money, like an increase in wage or more tips.

2. I think that public policy directly affects productivity, one example is funding for education, more specifically primary education. If, for example, the state government of Colorado were to suddenly increase the funding given to primary schools, then kids would have access to more classes that would teach them subjects outside of the curriculum. I know for a fact that not every school in Colorado has a STEM class as part of an enrichment opportunity, and I know that it’s because certain schools are in need of funding from the government. Technology is the future and it’s crucial that every kid is equipped with the tools he/she needs in order to be successful in the real world. Similarly, lower income families tend to invest less money into their child’s education because the costs of education are relatively high. That is why state governments should make an effort to contribute to a safe environment that promotes learning regardless of one’s financial situation.

[theabehernandez]

Chapter 11 Reflection

1. A person can’t really change the rate of inflation they face because inflation affects the prices of current goods and services. Unless a person were to spend less of a service and more of another, then he/she will experience the same rate of inflation. For example I know a lot of my friends whose parents bought them used cars in high school. The cars that their parents bought them weren’t part of the current GDP because they were like 3-5 years old. The reason why there’s an overestimation of inflation with the CPI is because there’s many biases around the CPI. For example, substitution bias exist because when prices increase, consumers tend to substitute lower-priced alternatives. Since the CPI incorporates a fixed weight-price index in a selected basket of goods, the CPI doesn’t prepare consumers for changes in price. Much like with older products, there’s something called new product bias in which new products aren’t introduced into the CPI until they become commonplace, that is they have to reach a certain benchmark. I definitely time some of my purchases around sales. Things like clothes and shoes are some of the things that I time in order to get the lowest price. Just last year there was a sale on video games during Thanksgiving and they were all like 1/2 off. Even though it was hard waiting around for the sale to go live, I got a pretty good deal in the end. Overall, I would say that I definitely consider buying more of something if it’s on sale, especially if it’s something I like. It’s like “I gotta have it!” even if I don’t really need it.

2. I do think that price distortions in certain goods are a problem. For example, I remember when the iPhone 6 first came out it was like $700 at base price. Just yesterday my friend came over asking me to help him activate his new iPhone 6 he bought at WalMart for $99 and it’s one of those things that made me wonder “Why are iPhones so gosh darn expensive?!” and more importantly, “Why do I really want one?” If I were to get a 2% raise in the same year when inflation increased by 2%, I would not break even and my life would be consequently the same. This is because everything I buy, lets say in a week, from groceries to gas to stuff from Amazon, would all go up in price by 2%. Naturally this would mean no more coupons or sales but still, thinking about it my life would kind of suck.

[theabehernandez]

Chapter 10 Reflection

1. Final goods are goods that are immediately used for consumption. Intermediate goods are goods that are produced and added to a firm’s inventory for later use or sale. This is important because both types of goods often have the same market value and they can add or subtract to the GDP.

2. I don’t think GDP is a good measure of wellbeing because it doesn’t measure the true health of our nation. Sure, GDP measures the market value of all goods and services but it doesn’t measure our nation’s education levels, crime rates, etc.

3. I think that Gross National Happiness is a good way to gauge the social progress of the nation. One of the problems with the GNH, however, is that not everyone in the country feels the same about different products, services, etc, so it would be difficult to measure how the country is doing overall. The major difference between GDP and the GPI is that the GPI measures things that the GDP often leaves out. For example, the GDP only measures economic growth based on products and services, and the GPI measures the cost of pollution that results from producing all goods and services.

[theabehernandez]

Chapter 7 Reflection

1. Economic efficiency is when all goods and factors of production in an economy are distributed and allocated to their most valuable uses and waste is eliminated or minimized.

2. Consumer surplus is the area above the market price and below the demand curve. Producer surplus is the area below the market price but above the supply curve. If the product price increases then the producer surplus increases but only at the expense of the consumer surplus. If the consumer surplus increases then the producer surplus decreases. If the price is above the market price then there’s surplus and if it’s below the market price then shortages occur. Shortages and surpluses reduce the total surplus and therefore total surplus is maximized when the price equals the market equilibrium price.

3. Market efficiency should always be the goal of policy setters. This is because a truly efficient market provides the maximum amount of opportunities of security for producers and consumers. More security eliminates and reduces loss on both aspects. Efficiency allows the market to flow and work well whereas equality often takes in the interests of some and neglects those of others. The trade off between efficiency and equality is simply how many people participate in the market. If an imbalance arises where the majority of consumers don’t have access to the market, then policy setters should shift their focus to equality. A balance between efficiency and equality will ensure the wellbeing of the economy as a whole.

[theabehernandez]

Chapter 6 Reflection

1. This article from the New York Times is a perfect example of the concepts mentioned in chapter 6. The article talked about the various problems happening in Venezuela that have been associated with the price controls on food and other products. The prices in government-subsidized stores are so low that farmers and manufacturers have reduced their supply an have caused widespread scarcities for the residents of Venezuela. The goal of the central government was to eliminate the gap between the rich and the poor. As the book mentioned, sometimes government policies work in unexpected ways and end up harming communities instead. The price controls have caused products missing from store shelves to show up in the black market at much higher prices.

2. If the price of bottled water had increased after Hurricane Katrina, then the demand would’ve decreased because water is a normal good. Once price ceilings were imposed, to reduce the price of water bottles, the demand would’ve increased and shortage would occur. Some people with more money in their pockets than others would end up hoarding and taking more water bottles than they needed causing others to have less or none. The idea of fairness fits nicely in this case because according to the law of supply and demand, the market, in this case water bottles, will reach equilibrium and supply will meet demand at the right price. Price controls end up treating water and other necessities as inferior goods during emergencies and affect the economy in a negative way.

3. The two disaster situations are different because in the case of Hurricane Katrina price controls are temporary whereas price controls in Venezuela have been permanent. Supply and demand could be affected in the same way if the price controls decreased the overall supply of similar products in the market at a similar rate. Prices have remained low in both situations due to price controls. They may provide incentives for people to hoard more because supply is low.

4. I chose an article from CNN that said 24 states will raise the minimum wage in 2020. The new minimum wage would be $15/hr and its supporters claim it will help the existing workforce with the ever-increasing costs of living. Opponents to raising the minimum wage argue that if employers have to pay their workers $15/hr, they’ll hire less workers, especially unskilled workers. According to the Congressional Budget Office, an increase in the wage rate of $15/hr would result in a loss of .8 percent of the workforce. Raising the minimum wage in states with large cities would mostly affect the service labor market, especially fast food workers whose minimum wage would be binding. Raising the minimum wage would increase the supply of labor and decrease the demand for unskilled labor.