This chapter discusses the temporary tradeoff between inflation and unemployment that arises from unanticipated inflation. A rising rate of inflation may reduce unemployment, and the effects may last for something like two to five years. The negative relationship between inflation and unemployment is shown on the Philips curve. To get to a point on the Philips curve with higher inflation and lower unemployment, policymakers expand aggregate demand. The opposite is true for a point on the Philips curve with lower inflation and higher unemployment (contracting aggregate demand).
The relationship between inflation and unemployment holds true only in the short run because in the long run, expected inflation adjusts to changes in actual inflation; thus shifting the short-run Philips curve. In the long run, this curve is vertical at the natural rate of unemployment.
Adverse supply shock->policymakers must accept a higher rate of inflation for any given rate of unemployment or a higher rate of unemployment for any given rate of inflation.
Wednesday, April 6, 2016
Monday, March 21, 2016
Chapter 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand
This chapter focuses on the government tools that influence the aggregate-demand curve in the short-run; that is monetary policy and fiscal policy. We first examine the short-run market through Keyne's theory of liquidity preference that states the interest rate adjusts to bring money supply and money demand into balance. Both nominal and real interest rates are affected and move in the same direction. (Real+nominal=short-run, nominal=long-run). Money supply in this market is controlled through the Fed Reserve and so is fixed/ vertical. Money demand is determined in large by the interest rate, where an increased interest rate raises the cost of holding money, and as a result, reduces the quantity of money demanded. The market is constantly trying to maintain an equilibrium interest rate.
If the interest rate is above the equilibrium level, the quantity of money that people want to hold is less than the quantity supplied. Those people buy interest-bearing assets and banks/loaners respond with lower interest rates. The reverse of this is true for when interest rates are below the equilibrium level.
There is a negative relationship between price level and quantity demanded. When price level increases, the quantity of money demanded increases at any given interest rate, thus shifting the MD curve to the right. This, however, only translates to a leftward movement along the aggregate-demand curve because it is only for a specific price level. This reduces quantity of output.
If the interest rate is above the equilibrium level, the quantity of money that people want to hold is less than the quantity supplied. Those people buy interest-bearing assets and banks/loaners respond with lower interest rates. The reverse of this is true for when interest rates are below the equilibrium level.
There is a negative relationship between price level and quantity demanded. When price level increases, the quantity of money demanded increases at any given interest rate, thus shifting the MD curve to the right. This, however, only translates to a leftward movement along the aggregate-demand curve because it is only for a specific price level. This reduces quantity of output.
Wednesday, March 9, 2016
Chapter 33: Aggregate Demand and Aggregate Supply
Unlike previous chapters, chapter 33 focuses on short run variables and the interaction of real and nominal variables (we ignore money neutrality and classical dichotomy). It is important to know that economic fluctuations are irregular and unpredictable, most macroeconomic quantities fluctuate together, and as output falls, unemployment rises. The model of aggregate demand and supply has two variables: the output of goods and services (real GDP) and the average level of prices (measured by the CPI or GDP deflator).
The aggregate-demand curve is a curve that shows the quantity of goods and services that households, firms, the government, and customers want to buy at each price level. The aggregate supply-curve is a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level. Price level is on the vertical axis, while quantity of output is on the horizontal axis. This model may look like the simple supply and demand model in Chapter 4, but it shows all goods in services in all markets in the entire economy; there are no substitutions.
The aggregate-demand curve is a curve that shows the quantity of goods and services that households, firms, the government, and customers want to buy at each price level. The aggregate supply-curve is a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level. Price level is on the vertical axis, while quantity of output is on the horizontal axis. This model may look like the simple supply and demand model in Chapter 4, but it shows all goods in services in all markets in the entire economy; there are no substitutions.
Sunday, February 28, 2016
Chapter 32: A Macroeconomic Theory of the Open Economy
This chapter discusses the two markets of an open economy: the market for loanable funds and the market for foreign-currency. In the market for loanable funds, demand is I+NCO, and supply is S (savings), while in the market for foreign-currency exchange, demand is net exports and supply is held constant from NCO. The link between the two is NCO, and the real exchange rate balances both their supply and demand.
In the market for loanable funds, when NCO>0, there is net capital outflow and this adds to the demand for domestically generated loanable funds. When NCO<0, there is net capital inflow, and capital resources coming from abroad reduce the demand for domestically generated funds. The quantity or loanable funds supplied and demanded depends on the real interest rate. An increase in the real interest rate discourages Americans from buying foreign assets and encourages foreigners to buy U.S. assets therefore reducing net capital outflow.
In the market for foreign-currency exchange, it is important to remember NCO=NX. If NX>0, NCO>O (buying foreign assets w/ bank) and if NX< 0, NCO <0 (spending must be financed by selling American assets abroad). When the U.S. real exchange rate appreciates, U.S. goods become more expensive relative to foreign goods, making U.S. goods less attractive to consumers both at home and abroad.
In the market for loanable funds, when NCO>0, there is net capital outflow and this adds to the demand for domestically generated loanable funds. When NCO<0, there is net capital inflow, and capital resources coming from abroad reduce the demand for domestically generated funds. The quantity or loanable funds supplied and demanded depends on the real interest rate. An increase in the real interest rate discourages Americans from buying foreign assets and encourages foreigners to buy U.S. assets therefore reducing net capital outflow.
In the market for foreign-currency exchange, it is important to remember NCO=NX. If NX>0, NCO>O (buying foreign assets w/ bank) and if NX< 0, NCO <0 (spending must be financed by selling American assets abroad). When the U.S. real exchange rate appreciates, U.S. goods become more expensive relative to foreign goods, making U.S. goods less attractive to consumers both at home and abroad.
Monday, February 22, 2016
Chapter 31: Open-Economy Macroeconomics: Basic Concepts
We are introduced with the concept of an open economy, one that interacts freely with other economies around the world. These interactions occur in two forms: the buying and selling of goods and services in world product markets and the buying and selling of capital assets such as stocks and bonds in world financial markets. When there is a trade deficit, exports are less than imports, net exports are negative, saving is less than investment, and net capital outflow is negative; the reverse is true of trade surpluses; balanced trade lies in the middle.
There were several identities in this chapter. The new ones were net exports (also called trade balance) and net capital outflow (also called net foreign investment). Net exports refer to the value of a nation's exports minus the value of its imports. If net exports is positive, the country is said to run a trade surplus, or an excess of exports over imports. If NX<0, it is a trade deficit, and if NX=0, it is said to have balanced trade. Net capital outflow is the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners. If NCO>0, domestic residents are buying more foreign assets than foreigners buying domestic assets. Capital is flowing out of the country. If NCO<0, a country is experiencing a capital inflow.
The idea of saving, investment, and their relationship to the international flows was also expanded. We previously learned Y=C+I+G, and in this chapter, NX was added to the right side of the equation due to the concept of an open market economy. Also, S=I+NCO (saving=domestic investment+net capital outflow).
This chapter was kind of confusing because there is a lot of terminology. However, I feel like it is mostly memory and just needs repetition. I was a little confused about the part with trade deficits induced by a fall in savings or by an investment boom; and the effects of each.
There were several identities in this chapter. The new ones were net exports (also called trade balance) and net capital outflow (also called net foreign investment). Net exports refer to the value of a nation's exports minus the value of its imports. If net exports is positive, the country is said to run a trade surplus, or an excess of exports over imports. If NX<0, it is a trade deficit, and if NX=0, it is said to have balanced trade. Net capital outflow is the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners. If NCO>0, domestic residents are buying more foreign assets than foreigners buying domestic assets. Capital is flowing out of the country. If NCO<0, a country is experiencing a capital inflow.
The idea of saving, investment, and their relationship to the international flows was also expanded. We previously learned Y=C+I+G, and in this chapter, NX was added to the right side of the equation due to the concept of an open market economy. Also, S=I+NCO (saving=domestic investment+net capital outflow).
This chapter was kind of confusing because there is a lot of terminology. However, I feel like it is mostly memory and just needs repetition. I was a little confused about the part with trade deficits induced by a fall in savings or by an investment boom; and the effects of each.
Monday, February 15, 2016
Chapter 30: Money Growth and Inflation
Stockman discusses money growth and inflation. The overall level of prices in an economy adjusts to bring money supply and money demand into balance (where the supply is fixed by the Fed and the demand for money reflects how much wealth people want to hold in liquid form); in other words: the quantity of money available determines the price level. Stockman then goes on to discuss classical dichotomy.
I thought this chapter was pretty confusing and contained a lot of vocabulary words (inflation,: the increase in the overall level of prices, deflation: the decrease in the overall level of prices, hyperinflation: an extraordinarily high rate of inflation, quantity theory of money: a theory asserting that the quantity of money available determines the price level and the growth rate and the quantity of money available determines the inflation rate, nominal variables-variables measured in monetary value, real variables: variables measured in physical units, classical dichotomy: the theoretical separation of nominal and real variables, monetary neutrality-the proposition that changes in the money supply do not affect real variables). I'm still trying to figure out how they all relate and I would also like to go over the graphs, because they're a lot different that all the other graphs we've previously discussed.
I thought this chapter was pretty confusing and contained a lot of vocabulary words (inflation,: the increase in the overall level of prices, deflation: the decrease in the overall level of prices, hyperinflation: an extraordinarily high rate of inflation, quantity theory of money: a theory asserting that the quantity of money available determines the price level and the growth rate and the quantity of money available determines the inflation rate, nominal variables-variables measured in monetary value, real variables: variables measured in physical units, classical dichotomy: the theoretical separation of nominal and real variables, monetary neutrality-the proposition that changes in the money supply do not affect real variables). I'm still trying to figure out how they all relate and I would also like to go over the graphs, because they're a lot different that all the other graphs we've previously discussed.
Article Review 7: "Simple Janet"
David Stockman criticizes the capacity of the Fed, aiming most of his criticism at Janet Yellen. He goes so far as saying that the Fed can do nothing to help the catastrophe, but that instead, the catastrophe (our economy) was caused by the Fed. So far, the Fed has just been injecting money into the economy and falsifying money market interest rates in an effort to induce businesses and households to borrow + spend more. However, we are at peak debt, and this policy will not work (yet the Fed is so focuses on this policy like a broken flash drive).
There has been negative growth in household debt since the financial crisis, most jobs are "born-again" jobs, and our growing debt has not been used for productive assets. NIRP is a colossal fail in Europe and is not an exception in America. (I looked up NIRP and it is an unconventional monetary policy whereby nominal target interest rates are set with a negative value, below the theoretical lower bound of zero percent. Instead of receiving money on deposits, depositors must pay regularly to keep their money with the back. This creates at incentive to invest, lend, and spend). However, Stockman greatly urges that this is not only an "unconventional" policy but also a disastrous one.
There has been negative growth in household debt since the financial crisis, most jobs are "born-again" jobs, and our growing debt has not been used for productive assets. NIRP is a colossal fail in Europe and is not an exception in America. (I looked up NIRP and it is an unconventional monetary policy whereby nominal target interest rates are set with a negative value, below the theoretical lower bound of zero percent. Instead of receiving money on deposits, depositors must pay regularly to keep their money with the back. This creates at incentive to invest, lend, and spend). However, Stockman greatly urges that this is not only an "unconventional" policy but also a disastrous one.
Sunday, February 7, 2016
Chapter 29: The Monetary System
Mankiw discusses money, which is fundamental in creating an allocatively efficient economy. The three purposes of money are the following: provide a medium of exchange (an item that buyers give to sellers when they want to purchase goods + services), a unit of account (the yardstick people use to post prices and record debts), and a store of value (an item that people can use to transfer purchasing power from the present to the future); stocks and bonds are other examples of stores of value. There are two kinds of money, commodity and fiat. Commodity money refers to money that has intrinsic value even if not decreed by the government, while fiat money is money w/o intrinsic value. Mankiw then told an example in Iraq where "swiss dinars" were used over government decreed "Saddam dinars" (fiat money) perhaps due to social convention and expectations.
The difference between wealth and money is often not differentiated in modern terms, so it is important to note that wealth refers to all stores of value (money+nonmonetary assets). I thought this chapter was pretty straightforward; there was just a lot of terminology. The fact that peacock feathers and cigarettes was interesting and strange, and it made me wonder about our current economy (how I never thought it was weird to accept and pay for goods and services in paper; and that Mankiw saw this was 'rare', but I wish he would expand on this. I'm pretty sure other economies run the same way, or does he mean rare historically?). It was also interesting to know that the average American should have about 3,272 in their pockets which is sadly, for me, not the case. The plausible explanations are: much of currency is held abroad and much of the currency is held by drug dealers, tax evaders, and other criminals (and thus not sitting in the bank).
The difference between wealth and money is often not differentiated in modern terms, so it is important to note that wealth refers to all stores of value (money+nonmonetary assets). I thought this chapter was pretty straightforward; there was just a lot of terminology. The fact that peacock feathers and cigarettes was interesting and strange, and it made me wonder about our current economy (how I never thought it was weird to accept and pay for goods and services in paper; and that Mankiw saw this was 'rare', but I wish he would expand on this. I'm pretty sure other economies run the same way, or does he mean rare historically?). It was also interesting to know that the average American should have about 3,272 in their pockets which is sadly, for me, not the case. The plausible explanations are: much of currency is held abroad and much of the currency is held by drug dealers, tax evaders, and other criminals (and thus not sitting in the bank).
Thursday, January 28, 2016
In chapter 28, Mankiw focuses on the natural rate of unemployment (a long-run problem). Unemployment is important because it decreases from the economy's GDP, and thus the economy's standard of living. Unemployment is an imperfect measurement from the BLS of those who want to work but who do not have jobs, perhaps because of either frictional or structural unemployment. For example, discouraged workers (individuals who would like to work but have given up looking for a job) are not included in the measurement.
I am a little confused about the "seemingly contradictory" result: most spells of unemployment are short, and most unemployment observed at any given time is long-term; and the example of the four government employment workers did not help.
It is important to note that the unemployment is never zero, but fluctuates around the natural rate of unemployment. This is due to frictional unemployment (it takes time for workers to search for the jobs that best suit their tastes and skills) and structural unemployment (unemployment that results because not enough job positions).
I am a little confused about the "seemingly contradictory" result: most spells of unemployment are short, and most unemployment observed at any given time is long-term; and the example of the four government employment workers did not help.
It is important to note that the unemployment is never zero, but fluctuates around the natural rate of unemployment. This is due to frictional unemployment (it takes time for workers to search for the jobs that best suit their tastes and skills) and structural unemployment (unemployment that results because not enough job positions).
Sunday, January 24, 2016
Chapter 27: The Basic Tools of Finance
Chapter 27 discusses finance, or the field that studies how people make decisions regarding the allocation of resources over time and the handling of risk. We were given the equation to find future value (assuming the account was being compounded), which is FV=(1+r)^y * PV. To get present value, one would just divide. The chapter then discussed managing risk in regards to risk aversion (those whose pain of loss exceeds pleasure of winning), the markets for insurance (where the goal is to spread risks around more efficiently, but it faces adverse selection and moral hazard), diversification of firm-specific risk (reducing risk by replacing a single risk with a large number of smaller, unrelated risks), and the trade-off between risk and return (stocks offer higher potential risk and return).
The standard deviation part confused me a bit. I know a variable typically stays within two standard deviations of its average about 95 percent of time, but I just remember this as a fact. I haven't really applied it to anything, so I was confused when the book said,"thus, while actual returns are centered around 8 percent, they typically vary from a gain of 48 percent to a loss of 32 percent." Otherwise, the chapter was fine but I want to go over the math.
The standard deviation part confused me a bit. I know a variable typically stays within two standard deviations of its average about 95 percent of time, but I just remember this as a fact. I haven't really applied it to anything, so I was confused when the book said,"thus, while actual returns are centered around 8 percent, they typically vary from a gain of 48 percent to a loss of 32 percent." Otherwise, the chapter was fine but I want to go over the math.
Monday, January 18, 2016
Article Review
David Stockman discusses the December "job" report, stating that it is the last positive delta standing. However, it is only positive because of fake numbers; basically, it's BS from the BLS. Numbers are over inflated using "seasonal adjustment". Therefore, the job report does not reflect the actual state of the economy, which is "knocking at the door of a recession." The number is used by pretentious wall streeters wearing fake smiles, who want buyers to keep on buying (where stock market prices are also probably a lie too).
The job report does not take into consideration different types of jobs or salary distribution. It counts jobs that are "born again", after being lost from-you guessed it-the crashes/collateral damage of the financial bubble crash. The report is rubbish.
Though a little hard to understand, it is evident that no matter what pointless "facts" are thrown in our face, we need to fear and expect a recession; a recession that has been prolonged and denied for as long as possible by people like Ben Bernanke (who, before a crash, called the economy "the great moderation". Ha.)
I appreciate Stockman's passionately honest tone, as he is someone that will not put up with lies/deceit. The article, though not containing pleasant information, was a good read.
The job report does not take into consideration different types of jobs or salary distribution. It counts jobs that are "born again", after being lost from-you guessed it-the crashes/collateral damage of the financial bubble crash. The report is rubbish.
Though a little hard to understand, it is evident that no matter what pointless "facts" are thrown in our face, we need to fear and expect a recession; a recession that has been prolonged and denied for as long as possible by people like Ben Bernanke (who, before a crash, called the economy "the great moderation". Ha.)
I appreciate Stockman's passionately honest tone, as he is someone that will not put up with lies/deceit. The article, though not containing pleasant information, was a good read.
Thursday, January 14, 2016
Chapter 26: Saving, Investment, and the Financial System
Mankiw introduces saving, investment, and the financial system in chapter 26. The financial system the group of institutions in the economy that help to match one person's saving with another person's investment; this is special characteristic of financial markets because they link current income with future purchasing power. The categories of financial institutions in the U.S. are financial markets (bond and stock markets) and financial intermediaries (banks and mutual funds).
The difference between a financial market and financial intermediary is that a financial market is an institution through which savers can directly provide funds to borrowers, whereas a financial intermediary is more indirect.
The difference between a financial market and financial intermediary is that a financial market is an institution through which savers can directly provide funds to borrowers, whereas a financial intermediary is more indirect.
There was a lot of information in this chapter, and I thought it was kind of a weird transition from GDP + CPI (which were more closely related). However, I think the chapter did a good job emphasizing the importance of financial systems, which made the chapter more interesting.
Sunday, January 10, 2016
Chapter 24: Measuring the Cost of Living
The cost of living over time is measured by the consumer price index, which is a measure of the overall cost of the goods and services bought by a typical consumer. This CPI is measured monthly by the Bureau of Labor Statistics in these five steps: fixing the basket (determining which prices are most important to the typical consumer), finding the prices of the goods in the basket, computing the basket's cost (the prices change, but the quantity does not), choosing a base year and computing the index, and computing the inflation rate.
This calculation is used for specific metropolitan areas within the country, some narrow categories of goods and services, and calculating the producer price index, which can be used to predict changes in the consumer price index.
The problems with CPI are the substitution bias, the introduction of new goods, and unmeasured quality change.
The GDP deflator and CPI are different in that the GDP deflator reflects the price of all goods and service produced domestically, whereas the CPI reflects the prices of all goods and services bought by consumers (including foreign goods). Also, CPI has a fixes basket of goods compared to GDP that compares the price of currently produced goods and services.
This calculation is used for specific metropolitan areas within the country, some narrow categories of goods and services, and calculating the producer price index, which can be used to predict changes in the consumer price index.
The problems with CPI are the substitution bias, the introduction of new goods, and unmeasured quality change.
The GDP deflator and CPI are different in that the GDP deflator reflects the price of all goods and service produced domestically, whereas the CPI reflects the prices of all goods and services bought by consumers (including foreign goods). Also, CPI has a fixes basket of goods compared to GDP that compares the price of currently produced goods and services.
Tuesday, January 5, 2016
Chapter 23: Measuring a Nation's Income
This chapter discussed one of the basics of macroeconomics: GDP (gross domestic product), or the market value of all final goods and services produced within a country in a given period of time. GDP measures the total income of everyone in the economy and the total expenditure of the economy's output of goods and services; where for an economy as a whole, income must equal expenditure due to the interactions of two parties: the buyers and sellers. The identity for GDP is Y=C+I+G+NX, and the GDP is typically calculated in time periods of a year or quarter (*the quarter rate usually presents GDP at an annual rate*).
Though this chapter went in depth about GDP, it threw a lot of vocabulary words at the reader and did not expand on ones that I felt needed more clarification. The FYI, which will be on the AP test, was very vague. Terms mentioned were GNP (total income earned by a nationals even if abroad), NNP (the total income of a nations's residents minus depreciation), National Income (total income earned by a nation's residents; excluding indirect business taxes and business subsidies), Personal Income (income that households and non corporate businesses receive; excluding retained earnings, subtracts corporate income taxes+contributions for social security, and includes interest and transfer program incomes), Disposable Personal Income (=Personal Income-(personal taxes+certain non tax payments)).
The chapter then went on to discuss the four components of GDP: consumption (C), investment (Y), government purchases (G), and net exports (NX), real versus nominal GDP, GDP Deflators, and the pros/cons of using GDP to measure economic well-being.
Though this chapter went in depth about GDP, it threw a lot of vocabulary words at the reader and did not expand on ones that I felt needed more clarification. The FYI, which will be on the AP test, was very vague. Terms mentioned were GNP (total income earned by a nationals even if abroad), NNP (the total income of a nations's residents minus depreciation), National Income (total income earned by a nation's residents; excluding indirect business taxes and business subsidies), Personal Income (income that households and non corporate businesses receive; excluding retained earnings, subtracts corporate income taxes+contributions for social security, and includes interest and transfer program incomes), Disposable Personal Income (=Personal Income-(personal taxes+certain non tax payments)).
The chapter then went on to discuss the four components of GDP: consumption (C), investment (Y), government purchases (G), and net exports (NX), real versus nominal GDP, GDP Deflators, and the pros/cons of using GDP to measure economic well-being.
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