THE LAST CHAPTER

Chapter 35 is about the short run trade-off between inflation and unemployment. The Phillips curve is the short-run relationship between inflation and unemployment. This idea was first published in 1958 by A.W Phillips in an articled titled "The relationship between Unemployment and the Rate of Change of Money Wages in the United Kingdom". He showed a negative correlation between  the rate of unemployment and the rate of inflation: years with low unemployment tend to have high inflation and years with high unemployment tend to have low inflation. The natural rate of unemployment depends on various features of the labor market (minimum wage laws, market power of unions, etc). The inflation rate depends primarily on growth in the quantity of money controlled by the Fed. Paul Samuelson and Robert Solow reasoned that this correlation arises because low unemployment was associated with high aggregate demand which in turn puts upward pressure on wages and prices throughout the economy. The Phillips curve simply shows the combinations of inflation and unemployment that arise in the short run as shifts in the aggregate-demand curve move the economy along the short-run aggregate-supply curve. An increase in the aggregate demand for goods and services leads, in the short run, to a larger output of goods and services and a higher price level. Larger output means greater employment and thus a lower rate of unemployment. Shifts in aggregate demand push inflation and unemployment in opposite directions. If policymakers expand aggregate demand they can lower unemployment but only at the cost of higher inflation. Contracting aggregate demand they can lower inflation but at the cost of temporarily higher unemployment. In the 1960's, however, it was concluded that inflation and unemployment are unrelated in the long run. . The long-run Phillips curve is vertical at the natural rate of unemployment. Monetary policy could be effective in the short run but not in the long run.

Chp. 34

Chapter 34 covers how a government's monetary (supply of money set by the central bank) and fiscal (the levels of governments spending and taxation set by the president and Congress) policies affect aggregate demand. The aggregate demand curve shows the total quantity of goods and services demanded in the economy for any price level. For the U.S economy the most important reason for the downward slope of the aggregate demand curve is the interest rate effect. The theory of liquidity preference is Keyne's theory that the interest rate adjusts to bring money supply and money demand into balance.    The nominal interest rate is the interest rate usually reported, and the real interest rate is the interest rate corrected for the effects of inflation. The first piece of the theory of liquidity preference is the supply of money, which is controlled by the federal reserve. The fed can alter the money supply through open-market operations, changing reserve requirements (amount of reserves banks must hold against deposits) or the discount rate (interest rate at which banks can borrow reserves from the fed). In this chapter the money supply will be fixed, therefore a vertical curve. The second piece of the theory of liquidity preference is the demand for money. The liquidity of money explains the demand for it: people choose to hold money instead of other assets that offer higher rates of return because money can be used to buy goods and services. If the interest rate is above the equilibrium level the quantity of money people want to hold is less than the quantity the fed has created.

Chp 33

Chapter 33 introduces aggregate demand and aggregate supply and shows how shifts in these curves can cause recessions. A period when output and incomes fall, unemployment rises, is known as a recession when it is mild and a depression when it is severe. Three key facts about economic fluctuations is that economic fluctuations are irregular and unpredictable, most macroeconomic quantities fluctuate together, and as output falls unemployment rises (because when firms produce fewer goods and services they lay off workers). Classical theory is based on the dichotomy and money neutrality. Classical dichotomy is the separation of economic variables into real and nominal while money neutrality is the property that changes in the money supply only affect nominal variables not real variables. These assumptions are an accurate description of the economy in the long run but not the short run.Therefore in the short run, changes in nominal variables such as money and prices are likely to have an impact on real variables. Short run nominal and real variables are not independent. As a results, in the short run, changes in money can temporarily move real GDP away from its long-run trend. The model of aggregate supply and aggregate demand can be used to explain economic fluctuations. This model is graphed with the price level, measured by the CPI/GDP deflator on the vertical axis and real GDP on the horizontal axis. Aggregate demand curve shows the quantity of goods and services households, firms, the government and customers abroad wish to buy at each price level. The aggregate supply curve shows the quantity of goods and services that firms produce and sell at each price level. Price level and output adjust to balance aggregate supply and aggregate demand. GDP=C+I+G+NX. A decrease in the price level increases consumption, investment, and net exports.

ARticle 8

The first thing that caught my attention was the way monetary policy was described as "creature of each nations domestic politics" and that the Narrative of Central Bank Omnipotence is in turn devolving into a Narrative of central Bank competition. This structural change in the 21st century is happening because of massive global debt. Instead of international economic cooperation everyone is competing and things just don't look too good. As discussed early in Micro, trade and cooperation is pretty good. Like in the prisoners dilemma. If we could only all trust each other everyone would be better off. But as humans we are incapable of it and put our self-interest ahead. Global trade volumes everywhere peaked in Quarter 4 and quarter 3 in 2014 and have declined since. I can tell that isn't exactly a good thing but I can't tell to what degree, just like the article predicts. But apparently the small percentage of decline in exports is kinda rare. With these small percentage declines its "next to impossible for a real economy to expand when exports are contracting" in the way they are today. I like how the dude says "real economy". It's funny how calling things "real" in economics is taken so seriously. Person A: blah blah blah percentage decline blah blah. Person B: Yes but is it a real percentage?? According to the this dude the U.S is already experiencing a recession. Luckily he gets right too it, unlike Stockman who just can't stop playing around and can no longer be taken seriously because of his weird choice of words. Anyway, yes, recession. A "mild" recession. An "earnings recession" because "the decline in export values has only started to show up as a decline in export volumes" which is "pretty much all macroeconomic evils". I like this guy, straightforward, doesn't mess around, cool dude cool dude. 

chp 32

Chapter 32 is a continuation of chapter 31 and goes over a macroeconomic theory of the open economy. To understand the forces at work in an open economy the supply and demand of two markets have to be focused on, the supply and demand in the market for loanable funds  (which coordinates the economy's saving, investment, and the flow of loanable funds abroad (a.k.a net capital outflow)) and the supply and demand for foreign-currency exchange (which coordinates people who want to exchange the domestic currency for the currency of other countries). Whenever a nation saves a dollar of its income, it can use that dollar to finance the purchase of domestic capital or to finance the purchase of an asset abroad. The supply of loanable funds come from national saving (S), and the demand for loanable funds comes from domestic investment (I) and net capital outflow (NCO). Loanable funds should be interpreted as the domestically generated flow of resources available for capital accumulation. The purchase of capital assets adds to the demand for loanable funds, regardless of whether that asset is located at home (I) or abroad (NCO). When NCO> 0 the country is experiencing a net outflow of capital; the net purchase of capital overseas adds to the demand for domestically generated loanable funds.

Chp 31

Chapter 31 is the beginning of macro-economics in open economies. A closed economy is an economy that does not interact with other economies in the world whereas an open economy does. An open economy interacts with other economies in two ways: it buys and sells goods and services in world product markets, and it buys and sells capital assets such as stocks and bonds in world financial markets. Exports are domestically produced goods and services that are sold abroad, and imports are foreign produced goods and services that are sold domestically. The net exports of any country are the difference between the value of a country's exports - the value of a country's imports. Net exports are also called trade balance since net exports can sell us whether a country is a buyer or seller in the world markets. If net exports are positive the country suns a trade surplus If negative then it is a trade deficit. If zero than the country has a balanced trade. Factors that influence a country's net exports are 1.) the tastes of consumers for domestic and foreign goods 2.) the prices of goods at home and abroad 3.) the exchange rates at which people can use domestic currency to buy foreign currency 4.) the income of consumers at home and abroad 4.) the cost of transporting goods from country to country and 5.) government policies toward international trade. Net capital outflow refers to the difference between purchase of foreign assets by domestic residents and the purchase of domestic assets by foreigners.

Article #7

In this article David Stockman totally destroys Janet Yellen and her thoughts on the possibility of negative interest rates. He refers to her as a "delusional Simpleton" and a person who says "the same stupid thing over and over again. One interesting thing in the beginning was that the US economy cannot be supported, or more so rescued by central bank policy intervention (according to Stockman). I've said this once but I'll say it again. Stockman, you sir, are a ray of sunshine. Apparently there a two ways that the Fed can our economy today. It can inject central bank credit to raise prices and lower yields. Or it can falsify money market interest rates and the yield curve which will push households and businesses to borrow and spend more. I don't think I know enough or fully understand to make an opinion of either of the options. I want to comment on the whole getting houses and business borrowing and spending more than they have to. Wouldn't that just lead to some more problems. I know borrowing and spending is very good for the economy. Putting money into a bank increases the money supply since interest is applied to it. Spending makes the economy grow as well. But what about spending more than you can actually spend. I believe Mr. Waller once said that its alright and actually healthy for the economy to go through some recessions. It builds immunity since you learn what not to do in the future. So I guess this isn't too bad. Then again I'm just typing this off the top of my head. Sorry if I don't make sense...I tried.

Chp 30

Chapter 30 is on money growth and inflation. The phenomenon in which prices fall over a period of time is called deflation. Prices in recent history have had a substantial variation in the rate at which prices rise. The first insight about inflation is that it is more about the value of money than about the value of goods. Inflation is an economy-wide phenomenon that concerns, first and foremost, the value of the economy's medium of exchange. If p is the price of goods and services measured in terms of money, 1/p is the value of money measured in terms of goods and services. When the overall price level rises, the value of money falls. The supply and demand for money determines the value of money. The demand for money reflects how much wealth people want to hold in liquid form. The quantity of money demanded depends on the interest rate that a person could earn by using the money to buy an interest bearing bond rather than leaving it in a wallet or low-interest checking account.One variable that stands out in importance that affect the demand for money is the average level of prices in the economy. A higher price level (a lower value of money)increases the quantity of money demanded. The time horizon is what ensures that the quantity of money the Fed supplies balances the quantity of money people demand. In the long run, the overall level of prices adjusts to the level at which the demand for money equals the supply.

Chp 29

Chapter 29 is about the monetary system. haha "gastronomical desires". Anyway, the social custom of using money for transactions is extraordinarily useful in a our society. If there were no paper money than we would have to rely on barter, which is the exchange of one good or service for another. An economy that relies on barter will have trouble allocating its scarce resources efficiently. This economy is said to require double coincidence of wants, which is the unlikely occurrence that two people each have a good or service that the other wants. Money is the set of assets in an economy that people regularly use to buy goods and services from other people. According to the economist's definition, money includes only those few types of wealth that are regularly accepted by sellers in exchange for goods and services. Money has three functions in the economy. It is a medium of exchange, a unit of account, and a store of value. A medium of exchange is an item that buyers give to sellers when they want to purchase goods and services. A unit of account is the yardstick people use to post prices and record debts. To measure and record economic value, money is used as the unit of account. Store of value is an item that people can use to transfer purchasing power from the present to the future.

Article #7

This article is about the continuous decline in the labor-force participation rate and the unemployment rate. One interesting thing is always how the data is collected and how calculations are made. Although this article did not go into too much depth it did say that “data is derived from a one-time survey of households that is only updated when population estimates are revised”. A one-time survey seems bound to have some mistakes and be a little off. Especially if it is only revised once in awhile. Apparently the unemployment rate looks alright or “healthy” because so many people have dropped out of the labor force, therefore lowering the labor force participation rate. If the labor force participation rate would have stayed the same from 2006 onwards, last year’s participation rate would have gone up to 11.4%, significantly more than the reported 6.2%. The biggest concern at the moment is that the share of “prime-age” men in the labor force is going down. I guess it would be less worrisome is the women’s labor force participation rate would go up but it hasn’t. The biggest reason for the decline in the labor force was summarized in a neat sentence. “With broader eligibility for the government-provided food stamps, health care, and disability benefits, it has become advantageous for some people to stay home than to work”. This is probably not a good thing since what makes economy grow is productivity.

Chp 28

Chapter 28 begins the study of unemployment . The problem of unemployment is divided into two categories: the long run problem and the short run problem. The economy's natural rate of unemployment refers to the amount of unemployment that the economy normally experiences. Cyclical unemployment refers to year-to-year fluctuations around its natural rate and is closely associated with economic activity.  The data the BLS uses comes from a regular survey of about 60,000 households called the Current Population Survey. Based on the answers the BLS places each adult in one of three categories. Employed includes those who are paid employees, work in their own business, or work as unpaid workers in a family business. Both full-time and part-time workers are included. Unemployed refers to those who are not employed but are available for work and are trying to find employment. It also includes those waiting to be recalled for a job from which they had been laid-off. Not in the labor force is the category for those who don't fit in the previous two categories such as a home-maker or full-time student. The BLS defines the labor force as the sum of the employed and the unemployed. The unemployment rate is defined as the percentage of the labor force that is unemployed and is calculated by taking the number of unemployed over the labor force and multiplying that by 100.

chp 27

Chapter 27 introduces some tools that help understand the decisions that people make as they participate in financial markets. Finance is the field that studies how people make decisions regarding the allocation of resources over time and the handling of risk.The first section of the chapter discusses how to compare sums of money at different points in time. Money today is more valuable than the same amount of money in the future. The present value of any future sum of money is the amount today that would be needed at current interest rates to produce that future sum. Future value is the amount of money in the future that an amount of money today will yield, given prevailing interest rates. r denotes interest rate. Compounding is the accumulation of a sum of money in, say, a bank account, where the interest earned remains in the account to earn additional interest in the future. If r is the interest rate, then an amount X to be received in N years has a present value of X/(1+r)^N. Because the possibility of earning interest reduces the present value below the amount X, the process of finding a present value of a future sum of money is called discounting. The higher the interest rate the more money can be earned by depositing the money at the bank. The concept of present value helps explain why investment- and thus the quantity of loanable funds demanded-declines when the interest rate rises. Risk aversion is a dislike of uncertainty.

Article #6

This Stockman article centers around the subject of seasonal adjustment, specifically its problems. Seasonal adjustment is a statistical procedure used because there certain times of the year where the economy produces more goods and services than usual. (Such as December when a ton of holiday shopping is going on. David Stockman is obviously not a big man of the way economist or, as he would call them, "statistical wizards" come up with the adjusted numbers. He refers to their seasonal adjustment system as a "pretentious stab in the dark" , an"invent(ed) guesstimate made year after year" and last but not least, not a science but simply "political fiction".I guess it's not the fact that seasonal adjustment is happening but more so that there are a ton of deviations that mess up the whole seasonal adjustment procedure. For example, the BLS takes into account that December is cold. But the fact that it doesn't get more specific than "cold", creates a less realistic number and seasonal adjustment. Which leads to the seasonal adjustment for jobs averaging 320,000 for the last 12 years.  This reminds me of the fixed basket that CPI uses. It's a problem since this fixed basket doesn't take into account things such as an unmeasured quality change, substitution bias, and introduction to new goods.  It seems as though the BLS is using seasonal adjustment to come up with a prettier number in the number of jobs added. But even that can't hide the fact that "the domestic economy is dead in the water". What lesson do we learn from this article? The same one we've learned in the previous ones. We're F#cked.

Chp 26

Chapter 26 is the beginning of a Unit 9 which is about the Real economy in the long run.  Chapter 26 is specifically about savings, investments, and the financial system. The financial system is a group of institutions in the economy that help to match one persons savings with another person's investment. Savings and investments are key ingredients to the long run economic growth: When a country saves a large portion of its GDP, more resources are available for investment in capital and higher capital raises a country's productivity and living standard. The financial system can be broken into two categories, Financial markets and financial intermediaries. Financial markets  are the institutions through which savers can directly provide funds to borrowers. The two most important financial markets in the economy are the bond markets and the stock markets. A bond is a certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond. It specifies the time at which the loan will be repaid, which is called the date of maturity, and the rate of interest that will be paid periodically until the loan matures. The principal is the promise of interest and eventual repayment of the amount borrowed. A buyer can hold the bond until maturity or sell it at an earlier date to someone else. Three characteristics to a bond: term (length of time until the bond matures, a bond that never matures is called a perpetuity which pays interest forever and principal is never paid), Credit risk The probability that the borrower will fail to pay some of the interest or principal (failure to pay= default) (junk bonds=high interest rates  bc corporations are financially riskayyy, and tax treatment the way the tax laws treat the interest earned on the bond.

chp. 24

This chapter examines how economist measure the overall cost of living by using the Consumer price index (CPI) which is a measure of the overall cost of goods and services bought by a typical consumer. It monitors changes in the cost of living over time. A rise in the consumer price index means that the typical family has to spend more dollars to maintain the same standard of living.The inflation rate is the percentage change in the price level from the previous period. When the Bureau of labor calculates the consumer price index and the inflation rate it uses data on the prices of thousands of goods and services. The first step would be to determine which prices are the most important to the typical consumer. The next step is to find the price of the products in three different periods. Quantity is kept the same to isolate the effect of price changes from the effect of any quantity changes. After that a base year is chosen and the index is calculated. The index is calculated by taking the price of the basket of goods and services over the price of the basket in the base year multiplied by 100. The index is always 100 in the base year. Lastly the inflation rate is calculated which is the percentage change in the price index from the preceding period and is calculated by
[(CPI in year 2  -- CPI in year 1)/ CPI in year 1] x 100. The BLS also calculates the producer price index which is a measure of the cost of a basket of goods and services brought by firms.

Chp 23

 This chapter is the first chapter that deals with macroeconomics. Maccroeconomics is defined as the study of economy-widee phenomena, including inflation (rate at which prices rise), unemployment, and economic growth, or simply the study of the economy as a whole. Often times a nations overall economy can be judged by looking at the Gross Domestic Product (GDP). GDp measure the total income of everyone in the economy and the total expidenture on the economy's output of goods and services. Another definition that focuses GDP as a measure of total expenditure would be that GDP is the market value of all final goods and services produced within a country in a given period of time. For an economy as a whole, income must equal expenditure. An economy's income is the same as its expenditure because every transaction has two parties: a buyer and seller. GDP can be computed in one of two ways: by adding up the total expenditure by households or by adding up the total iincome (wages, rent, and profit) paid by firms. Measuring GDP can at times be difficult because assumptions are made, illicit items or items consume/produced at home are excluded, and GDP only includes the value of final goods. GDP (y) is divided into four components: Consumption (C), Investments (I), Goverment purchase (G), and net exports (NX): y= c + I + G + NX. Consumption is spending by households on goods and services with the exception of purchases of new housing. Investment is spending on capital equipment, inventories, and structures, including purchases of new housing.