Chapter 35

Chapter 35 was all about the SHORT-RUN relationship between inflation and unemployment, since in the long run both factors are unaffected by one another. The Philips curve was introduced in the chapter to relate the concept back to aggregate demand and aggregate supply to understand why the curve is downward sloping. The natural rate hypothesis was also introduced to us, stating that unemployment would rather be unaffected by inflation in the long run. The chapter also conveys back to previous chapters by fully explaining supply shocks, which tend to alter firm's costs and prices, creating more than just "sticky" situations. The costs of reducing inflation, however, are also discussed and include rational expectations, as production must be held and then the loss must be calculated as a ratio of what was truly lost. For rational expectations there is a theory that discusses that people use all information given, including government's actions to somewhat guess what will happen in the near future. Eventually expectations change and so do the price level and inflation meaning that inflation and unemployment in the long run is unaffected.

Chapter 34

Chapter 34 discusses the effect of monetary and fiscal policies on the aggregate demand/supply curves. Discussing why the aggregate demand is downward sloping, being the wealth, interest, and real exchange effect. The interest is a key determinant of aggregate demand. We use the theory of liquidity preference to show how interest rates affect aggregate supply and demand. In the book it refers that we are determining are both nominal and real since since in the short run, expected inflation is unchanging so changes in the nominal equal real interest rates. The interest rate is the opportunity cost of money. When interest rates are high, people like to hold their money and economize it through bonds thus aggregate demand is reduced. Monetary policies target changing the interest rates or the money supply thus shifting the aggregate demand.
Fiscal policy refers to the government’s choices on the levels of government purchases and taxes. While fiscal policy can influence growth in the long run, its primary impact in the short run is on aggregate demand. When the government changes their level of government purchases of taxes, two outcomes can come into play: the multiplier effect and the crowding out effect. In the multiplier effect for example, the government purchases $20 billion worth of aircrafts. The incomes, wages, and profits rise in the aircraft manufacturers allowing the them to increase on consumption goods which raises the incomes of other firms. Since aggregate demand shifts right and may rise more than the government purchases, these government purchases are said to have the multiplier effect. The crowding out effect is the exact opposite of the multiplier effect. An increase in government purchases (as in the case above) raises incomes, which shifts the demand for money to the right. This raises the interest rate, which lowers investment. Thus, an increase in government purchases increases the interest rate and reduces, or crowds out, private investment. Due to crowding out, the aggregate-demand curve may shift right by less than the increase in government purchases.
Level of difficulty 2/3.

Article Review #10

In this article the authors convey that participants have internalized a faith in which central bankers are responsible for market outcomes. Then they go on and explain how monetary policy is a mold-able subject, that can be easily played with when it comes to politicians and big power. They also attack the Central Bank Omnipotence by stating that is turning into the Narrative of central bank competition, which in return means that difficulties have risen due to gigantic global debt. Q3 and Q4, being peaks in the economy in 2014, have been in decline, and then the authors go on stating how such low-high percentage numbers cannot be unless we are already in a recession. The contractions in exports are affecting trade levels and the recession is highlighted. Due to such things, Global growth is contracting, trade values from US, Asian and European worlds will pop the remains of the monetary policy.  The domestic political pressure to raise protectionist barriers and get a great part of the smaller trade. The government uses depreciation in the monetary system as its greatest weapon to keep business, or "factories", running. Meaning that China will have to cut prices in order to devalue its currency. The author then goes and states,"Competitive death spiral of monetary policy which will put everyone in worse positions shrinking the global pie further", meaning that due to such monetary policies and methods the global pie is to shrink even more!! To end the article the prisoner's dilemma is applied to real life. When global trade shrinks, the payoffs from monetary policy defections are no longer less than the payoff of monetary cooperation, defect is the domain, and there's a free rider who gets to take advantage of all others. Meaning "survival" mode.

Chapter 32/ Level of difficulty 2/3

Two markets are key to an open economy, those being the loanable funds market and the market for foreign-currency exchange. The real interest rate will adjust to fix the supply in the market for loanable funds from national savings and the demand, from domestic investment and net capital outflow. The market for foreign-currency exchange on the other hand the real exchange rate adjusts to balance the supply of dollars coming from net capital outflow and the demand for dollars, for net capital exports. Net capital is a shared variable in both markets, thus it is the connection amongst them. A policy may be imposed by the government and will decrease the amount of supply, but drive interest rates up. Higher interest levels reduce net capital outflow which would then reduce the amount of dollars in a foreign-currency exchange market. If the dollar would appreciate then there would be a fall in net exports. Some trade policies are designed to alter trade balance, such as tariffs , quotas and etc, but may not have such effects.

Chapter 31: level of difficulty 2/3

Chapter 31 dealt with an open economy where interaction with other economies in the world occurs freely. In such case there are two usages, the buying and selling of goods and services(product markets) and the buying and selling of assets such as stocks and bond (world-financial markets). Allowing the flow of goods to be imports and exports with a net exports, or value of a country's exports minus the value of the countries imports, this also being trade balance. In all there are also financial resources including new capital outflow which is calculated as purchase of foreign assets by domestic residents - purchase of domestic assets by foreigners. Thus, new capital outflow must equal net exports, since imports and exports happen during trade. Trade deficits happen when exports are less than imports and net exports are less than 0. Balanced trade happens when exports and imports are equal and net exports are equal to 0. While trade surpluses happen when exports are greater than imports and net exports are greater than 0. Saving, investment and capital have a relationship that is determined by manipulating the identity discovered in the previous chapters, that being y=c+I+g+NX to determine GDP, therefore the new equation becomes S=I+NX, or savings equal investment plus new capital outflow. Nominal exchange rates are the rate at which a person can trade the currency of one country for the currency of another, where values may appreciate or depreciate. Real exchange rates on the other hand are the rates at which goods and services are traded.

Article #8

Once again! David Stockman is to criticize the works and the workers of the Fed, claiming they do not know how to control the system. This time he specifically goes against Janet Yellen, whom is the chairman at this time. He claims that her Keynesian methods and tactics are not trying to help the economy, instead there is a deterioration that will sooner or later lead to a collapse. He then mentions that the US is trying to avoid the declining interest rates that are occurring in other parts around the world. Then he goes about to say that the zero interest rate and the negative interest rate would not help, and that she would need to stop thinking about the past and rather focus on present issues. He talks about how households and businesses have peek debt and that there is no sort of movement made in order to help them. Rather the Fed has decided to go around the issue, instead of actually fixing the result. Slowing not only economic but job growth as well. Then he goes and argues how there's been no progress that rather the jobs are the same jobs that had already existed. Not only this but he also points out how through most of her arguments Yeller contradicts herself. He is angry at the Fed and the job that they are doing.

Chapter 30

This chapter helped explain inflation and money growth, the relationships among both, and the difficulties that come along. Inflation being the increase in prices, but a decreasing value in the money held. Hyperinflation being inflation that exceeds over fifty percent per month. And deflation being the drop in prices and the increasement in value of money. In the long run the level of prices and the level at which the demand equals the supply will adjust. The quantity theory of money, asserts that the quantity of money available determines the price level and the growth rate in the quantity of money available determined by the inflation rate. Then there is the dichotomy of nominal variables (variables measured by money units) and real variables(variables measured with physical units). Bringing about the monetary neutrality which is the proposition that changes in the money supply do not affect real variables, since real variables are not measured in money. Velocity of money is the rate at which money changes hands. Represented by the nominal value(price level times the quantity of output) over the quantity of money. Which can be modified into M•V= P•Y, relative to the quantity equation. The inflation tax is a tax that is taxed on everyone holding money, that refers to the revenue the government raises to pay its spending by printing money. The fisher effect comes about when there is an adjustment of the nominal interest rate and the inflation rate. Costs of inflation would include the shoe leather cost, and the menu costs as well as distortions and confusions including that of the redistribution of wealth.