Chapter 17 - The Short-Run Trade-Off Between Inflation and Unemployment

 Describe the short run trade-off between inflation and unemployment.  Why is there not a long-run trade-off?  How long do you think the short-run lasts? (Or do you believe there is a trade-off at all - many economists don't.  Why?

Inflation and unemployment are linked in ways that economists now understand more clearly. In short, low unemployment is associated with high aggregate demand, which in turn puts upward pressure on wages and prices throughout the economy. This relationship is described as the Phillips curve. Because monetary policies shift the aggregate demand curve, the policies can move an economy along the Phillips curve. The Phillips curve compares inflation rates with unemployment rates and a balance is created between the two factors,

The length of time a short-run lasts depends on other factors in the economy but typically would be a day to a half of a year. This period allows for firms to make corrections which will move towards inflation-unemployment ratio. The Phillips curve trade-off is not stable and we correct itself by raising prices or higher inflation.

Is it a trade-off? I would think so. A decision is being made to the direction of the economy. The Fed would be trading one for another in the short-term. I understand the idea of this merely being a temporary adjustment, and not a trade at all but because of the reality of the short-term effects, a trade is being made in the desired outcomes for the economy as a whole.

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Chapter 16 - The Influence of Monetary and Fiscal Policy on Aggregate Demand

 This chapter talks about appropriate monetary and fiscal policies to affect the economy.  Spring and summer of 2020 we watched both in action.  What were the FRB's actions in their attempts to lessen the affect of Covid-19 on the economy? Were they successful? How about the federal government? Were they useful?  Do you agree with the actions taken by the FRB and the Federal government? Why or why not?  What are the risks associated with their policies?

(There are a lot of questions here and this really is the meat of the course.  I will give up to 10 points for exceptional responses.)

The Fed and the federal government both have acted to help with the extraordinary circumstances from the effects of COVID-19 and its effect on local, state, federal, and global markets and economies. One of the programs from the Fed is the Main Street Lending Program. This provided credit to small and medium companies that would otherwise have found securing credit difficult. The Fed has also kept interest rates low in hopes to keep the economy flush with inexpensive loaned money. The federal government tried early to ease the pain to the middle class with a stimulus check and actions such federal student loan payment deferment. 

The Fed is trying to instill confidence in this economy and get people and companies to spend money. Keeping rates for low for years to come will benefit the spenders and inspire projects to move forward. 

I do believe that the Fed did accomplish some of its goals for the economy. This is from my experience at work and my own personal experience with refinancing a home loan and cashing out equity to spend on home renovations. Working in residential design, the construction industry in Colorado and Salida is strong. People are using the low rates to secure money and help the economy. 

The federal government was fast to act early getting payments out quickly to help ease the pain from the shutdown to the economy in March and April. However with elections and politics getting in the way, the government has been unable to agree to a path forward. The new year and new administration will bring new challenges to the economy with programs ending and new ones badly needed to keep up with the effects of the pandemic.

It many ways the fed and government are managing the situation well enough for me. But this may not be and probably isn't the case with many people. Without getting to off topic the federal government should have did more to limit the growth of the virus. This may have limited the length of this affair. Now we are stuck waiting for a vaccine to move forward. The low rates help, payment deferments help, and stimulus money helps but confidence and clear messaging, in my opinion, could do more to move us forward.

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Chapter 15 - Aggregate Demand and Aggregate Supply

Spring of 2020 the world economy experienced a significant decrease in SRAS.  That was followed by a decrease in SRAD.  Draw those on a graph.  What would you expect to happen in your local economy as a result of those shifts? How do you expect the short run and the long run to be related? How long do you expect the short run to be? Why?  Will the new long run equilibrium be at a lower level? Why or why not? 

I believe that the graphs shown above, taken from chapter 17 of the textbook, demonstrates the actions which were we asked to show. Aggregate Supply (AS) decreases moving A to B with higher prices and lower output. Aggregate Demand (AD) also decreases and an increase in price follows. These actions have created less favorable conditions between balancing unemployment and inflation.

According to the graphs, in the local economy, prices have risen resulting in a tightening of pocketbooks and less discretionary spending. Less spending equates to less jobs and greater unemployment.

Fortunately my local economy is doing quite well with the City of Salida recently reporting its best ever posting of sales tax revenue. This is most likely starkly different from other areas. Salida is a tourist town with nice weather, somewhat local for Coloradoans, and benefited from proactive business leadership. 

The relationship between the Long-Run and Short-Run could be very interesting as the Short-Run policies are being pushed longer and the Long-Run repercussions could be artificially held back. COVID -19 has shown to be predicable unpredictable. There will be pent up demand when a vaccine rolls out. This will have a large positive effect on the economy as people and places are slowly and safely opened.

I hope and believe the economy of the US will improve in the coming years and with the new administration. Hopefully within the next year or two a vaccine is widely available to COVID-19 and a reopening world will stimulate growth for years to come. The Long-Run equilibrium may be totally reset, but hopefully within the next four years, the economy that isn't the stock market, will also be floating high.

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Chapter 14 - A Macroeconomic Theory of the Open Economy

https://www.marketplace.org/2020/10/06/augusts-trade-gap-was-the-biggest-in-14-years-thats-probably-good-news/

The piece above by Marketplace.org is relatively recent, being based on August numbers, show the trade gap widened to its greatest level in 14 years. Although the current President and others may be against trade deficits, this could be a sign of consumer confidence and purchasing power.

As consumers are purchasing imported inputs for future exports, we need the rest of the economy and world to demand more of our goods to help our recovery. 

At the end of the article it mentions comparative advantage and references the US being a net exporter of services. And selling more services can be more lucrative than t-shirts.

According to the people quoted in the piece, a trade deficit may show a quicker recovery in the US than the rest of the world. We are preparing for more exports in the future.

I know I will have pent up demand after this pandemic and will be looking for ways to escape when safe and available. I do believe that the economy should be steady in the future with a more consistent government in place and a feeling of relief with a vaccine and much less virus spread.

 

Pretend for a moment that Canada completely fell apart and began to experience capital flight. How does that affect interest rates and the US/CA exchange rate? How will it affect the US economy?

Canada's economy is in freefall. Our neighbors to the North have made monetary decisions which have caused extreme capital flight. Investors are calling on banks for cash looking for safer places to deposit money. As investors move capital from Canada to the US, they sell Canadian assets and buy American assets. This will increase the Canadian capital outflow. This capital outflow change then causes a supply issue of Canadian dollars in the exchange market. This capital outflow also starts to affect the demand curve for loanable money. This will eventually cause the Canadian dollar to depreciate in value. Capital flight increases interest rates and decreases the currency value in the foreign-currency exchange.

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Chapter 13 - Open_Economy Macroeconomics: Basic Concepts

 The aspects brought up in this chapter are extremely relevant to the current times and news cycles which are commonly including terms such as trade deficits, trade deals, tariffs, and negotiations due to the current President's policies and the history of trade with the United States, with China being the primary trade partner or adversary.

Currency appreciation and depreciation were other terms from this chapter which have current, real-world effects on the economy of the US and abroad. As monetary policy changes, so to can the value of currency. The exchange rate is the rate for which one currency can be exchanged for another, while the real exchange rate is the rate where both currencies purchase the same goods. The real exchange rate is the rate where one can trade goods of one country to another. A $4.00 beer in the states is a $2.00 beer in Mexico. The real exchange is 2 - 1 for the cost of a beer.

A real world example I experienced is when traveling to Cuba in 2016. Cuba has two currencies, one for Cubans and one for tourists. When exchanging dollars to CUC's an exchange rate of one-to-one but a tax on American dollars of 10% is added. This tax does not occur when exchanging Euros or other currencies. My wife and I were very fortunate to see Cuba when we did, we saw The Rolling Stones play, and was in Havana when President Obama was as well.

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Chapter 12 - Money Growth and Inflation

 

Inflation is like a tax; it erodes the value of holders and savers of money. One dollar today will buy less tomorrow. A balanced inflation rate is a product of an economy working well and is part of the FRB monetary policy.

The textbook discusses many of the costs of inflation including rising costs, menu costs, price variability, confusion, inconvenience and more detrimentally, can redistribute wealth from the generally poorer population of debtors to the wealthier loaners of credit. Menu costs is a new term for me, but I understand it effect on decisions of cost. Changing the cost of items, due to increase in costs from inflation or other factors has many costs associated with it from customer education to the printing of catalogs and other literature.

The Federal Reserve Board should worry about deflation as deflation can be a sign of deeper economic problems which could be on the horizon. Deflation is unpredictable, unstable, and can result in a redistribution of wealth away from debtors, who are often poorer.

The book mentions Thomas Friedman who points out that deflation causes reactions in the economy which would lower the nominal interest rate, which lowers the cost of saving. The major factors which deflation are a decrease in demand, or growth in supply. With the economy struggling in certain sectors from our current pandemic situation and operating nominally or better in others. If deflation started to occur now it would be signaling a broader problem in the state of the economy.

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Chapter 11 - The Monetary System

Cash is a vital part of the monetary system and the overall money supple. Central banks can manipulate the amount of cash available and this effects the price of goods and interest rates. This cash that is made available can be loaned by banks and with a multiplier effect can produce many more times the amount.

According to our textbook, one of the Ten Principles of Economics in Chapter 1 is that prices rise when the government prints to much money. Presently our Government is injecting cash into our economy in different programs in COVID-19 bills from unemployment benefits to rock bottom home mortgage loan rates and many other programs intended to keep the economy moving some and to keep people relatively safe, and in their homes.

But where is that money coming from? According to the New York Times, "out of thin air". Many methods of fiscal policy are attempted to manage the trillions of dollars needed for COVID relief. Historically speaking, an informal wall separated the Government for the Federal Reserve with the Government setting policy and spending tax dollars and the FED managing the cash available to ensure proper a proper functioning economy. 

In today's world the US government is spending money and increasing its debt and the FED has indicated it will finance an unlimited amount of Government debt. This puts these two entities working closer together than they have historically.

I currently feel that with massive increases of virus outbreaks and with the flu season coming, winter in the majority of the U.S., that money should be spent to control this virus. My habits have changed and so have millions of others and these changes to the economy have effects throughout the nation and beyond. 

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