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.

Read More

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.

Read More

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.

Read More

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.

Read More

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.

Read More

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.

Read More

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. 

Read More

Chapter 10 - Unemployment

Our textbook defines unemployment as those who were not employed, were available for work, and had tired to find employment during the previous four weeks. It also includes those waiting to be recalled to a job from which they had been laid off. Because the labor force will always have workers that are between jobs, laid-off from work, or unable to find adequate work, such as frictional unemployment, there will always be some unemployment in a healthy economy.

One such policy is Unemployment Insurance.  This policy allows for workers who have lost their jobs to receive a portion of what they had been earning. This increases the rate of unemployment for a short time because people who receive this benefit have less of an incentive to look for a new job.

I believe it is too early for me to fully understand the economics of this pandemic period and whether the governments response was appropriate. I believe the logic to the COVID-19 payments, was to keep money in the pockets of people who needed money to spend and limit the public's exposure to the virus. This amount of money was high enough for people to accept it and therefore remove themselves from the workforce. It this aspect the program may have worked. 

Many of the laid off workers who experienced long term job disturbance were disproportionately on lower wage workers. The $600/week has a substantial increase in income to this group of workers and amounted to a pay raise which decreased their desire to reenter the work force. This could have delayed the job recovery however as I earlier alluded to, the economics of this global pandemic will be studied for years to come as more data in analyzed and more studies are completed.

PreviousNext

 

Read More

Chapter 9 - The Basic Tools of Finance

As a non-traditional student in his forties, I have experience in saving, investing. I have purchased a home and later refinanced the loan and use investment accounts to save for retirement. Most of this saving has been in the last 15 years and nearly none during my first round of college right out of high school. 

I have been working in the construction industry for most of my career, designing and project managing working from an Architects office. I have been a part of many successful projects with the guidance of my boss and I hope that with the degree I am pursuing I will continue to design and coordinate successful construction projects on my own or with a larger company. I have seen the construction industry in Colorado continue to grow through the Great Recession and now a pandemic and the industry continues to thrive. Construction was listed as essential service during the recent economic shutdown period. This gives me great confidence in the industry and that the cost of my education will have a positive ROI in the near-term.

I am pursuing this degree in the most affordable manner taking classes online and off campus. I am taking classes here at CMC to complete credits for my degree at Colorado State University - Pueblo. This is saving money on the cost of classes. I have incurred some dept from my education and will graduate with roughly $25,000 in debt. I had been self paying for some classes but as the interest on student loans is zero, I have borrowed a little more to help finish.

I have seen my income increase over time and I want this trend to continue through my high earning years. This degree will give me the skills and experience to tackle projects of my own and will open up more possibility in the construction field which is booming in many markets.

Read More

Chapter 8 Saving, investment, and the financial system

This chapter is an important link in how we understand government policies today in the midst of the Covid-19 crisis.  The Federal government is running record deficits in an attempt to avert or minimize a recession/depression.  Look back at this chapter and discuss how this should affect the market for loanable funds.  Is that what we have seen happen (where is the equilibrium interest rate now - up or down?)  You should be left with a question - why have interest rates not increased?  

How does the loanable funds market help define/choose which investment projects are funded each year?

The interest rate is the price of a loan and this rate will determine the demand for the money. The quantity of loanable funds demanded falls as interest rates rise as because a high interest rate makes borrowing more expensive. Conversely, a high interest rate makes saving more attractive, and the quantity of loanable funds rises as the interest rates rise. 

In the US today, rates are historically low, 30 year fixed rate between 2-3% currently, this discourages savings as the rates are low. With savings low, the amount of money available should decrease, which would limit the availability and eventually, increase rates to equalize. This is not happening and the government is either selling bonds to foreign countries such as China or printing money and taking loans with increases our debt.

One reason the rates are not increasing is a move by regulators to artificially keep interest rates low to keep America spending. Saving is not lucrative, but buying is.

The loanable funds market can determine investment projects and policies by having the loanable funds market be funded by households and firms who wish to borrow and to make investments in particular projects.

Read More

Chapter 7 Production & Growth

This chapter focuses on the importance of productivity as a part of growth in GDP, the somewhat obvious idea that you can't consume something that was never produced, thus consumption is tied directly to productivity.  How does that concept support national subsidies in education and health?  How about infrastructure? 

Population growth tends to be a "hot topic".  What are the negatives associated with additional population growth? What are the positives?  (In terms of growth in GDP).  Where do you fall in the discussion? Why? 

Subsidies allow for growth in areas which may not able to create the demand without supplemental support. By creating safe and useful infrastructure, governments can create avenues for growth by increasing productivity. More roads of higher quality mean more distribution of goods and services.

I believe education and healthcare are also areas where when basic needs are taken care of, workers are more productive and can plan ahead. An education system produces the future ideas and workers while a healthy work force will also be more productive.

The US is a consumer based economy and if we are on producing, we are not consuming. There subsidies are used to encourage growth in these areas which allows for the consumption of more goods and services.

Population growth can be seen as a positive aspect of a healthy economy. It can lead to more production of goods and services, however population growth can also strain a system by limiting the availability of tools and skills needed for high production. "Countries with high population growth have large numbers of school-age children. This places a larger burden on the educational system." explains Mankiw.

My thoughts on population growth are a country needs a steady supply of workers to keep production up. Incentives can be made to either hinder or facilitate a rise in population. With many variables affecting the growth rate, a system with adequate controls to manipulate growth rates is something we need to do to handle growth.

Read More

Chapter 6 Measuring the Cost of Living

Many programs and benefits are tied to the Consumer Price Index, CPI, such as Social Security, school lunch programs and even our federal tax rate. The CPI is related to millions of workers benefits in many sectors and if this data is incorrect or miscalculated it would effect millions of families.

With so much being directly tied to the CPI, any problem in the data could have negative effects on the recipients of the benefits linked to the CPI data. These problems in the data would need to be accounted for in future adjustments. According to the textbook the problems which arise in the CPI are substitution bias, the introduction of new goods, and unmeasured quality change.

I live in Salida and the cost of living here is high when compared to some areas with real estate contributing the most. Home prices have steadily increased the past decade and increasingly is becoming more difficult for local workers to afford. Gas is higher here then in the metro areas and groceries are especially expensive now during this pandemic.

Social Security is vital to millions of retirees and many people are on fixed incomes. If the amount of money they receive doesn't match with the cost they are experiencing then inflation is negatively affecting their ability to pay for necessities. With school lunch programs being tied to the CPI, poorer and lower middle class people will be affected by the CPI more than people not reliant on government programs. Veterans and public sector workers are also affected by the CPI and the changes to it and the rate of inflation. Upper middle class and upper class workers less reliant on government programs and privately employed would feel the effects of changes to the CPI the least.

Read More

Chapter 5 Measuring a Nation's Income

What is Real GDP and Nominal GDP and how do they compare. What are each used for?

In the US, historically, the real GDP has increased over time, while suffering recessions at varying times and lengths, yet has grown at about 3% per year. This type of comparison over many years is made possible by using the real GDP which removes the effects of price changes to the production of goods and services over time. Nominal GDP measures the total spending on goods and services in all markets of the economy. As GDP rises from year to year, this increase is from either a larger production of goods or the goods are being sold at higher prices. In order for economists to measure the production rate of goods and services independent of the prices of the goods the real GDP is figured and used to accurately compare one year to another.

To apply this method to a current event example could be if economists wanted to compare the spending of consumers on groceries during the economic downturn of 2008 with the housing bubble crash or during the recession caused by the shutting down of the economy due to COVID-19. As the cost of groceries has changed over the years, using a real GDP number will compare the spending on groceries but with current grocery prices for both time periods.

Real gross domestic product (GDP) decreased at an annual rate of 31.4 percent in the second quarter of 2020 (table 1), according to the "third" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP decreased 5.0 percent.

Current‑dollar GDP decreased 34.3 percent, or $2.15 trillion, in the second quarter to a level of $19.41 trillion. In the first quarter, GDP decreased 3.4 percent, or $186.3 billion.

This information provided by the BEA.gov website.

COVID-19 is affecting all aspects of American lifestyles and those of citizens all over the globe. Balancing the countries GDP with its health is fraught with implications both known and unknown. One will affect the other and vice-versa.

One aspect of our economy which is proving to be troublesome is our reliance on consumer spending in the US. Our economy is driven by our spending and when we are not spending we are harming our economy. This is a detriment in a situation that we find our selves in now. We are unable to spend, because we have no work, without work, we do not spend which exacerbates the situation further. This is a over simplified example but I do feel that if we could remove our economy some from our spending on goods we could perhaps cushion some of the free falling economy. Of course, if we were more heavily into manufacturing, we could still be suffering as the world consumption is a fraction of pre-COVID-19

Read More

Chapter 4 The Market Forces of Supply and Demand

Uber and Lift have been industry changing companies and continue to push regulators and consumers to keep up or be left behind. Taxi's for a long time had very little to compete with terms of private, quick, door to door service until these new Gig companies came on the scene. Fast easy service, up front pricing and a modern user interface brought these companies to the forefront of our daily lives faster than the regulators or cities could effectively stay ahead of the business.

The cost of a taxi medallion must be linked to its value, the amount of money to be made from this permit. If the money to be made from a taxi medallion goes down, then the value of the medallion drops with it. Uber allowed drivers to connect with riders and removed a large part of the taxi user base and most likely the revenue gained from the cost of the medallion.

I have enjoyed learning more about the minimum wage from an economics stand point. As a worker I always wanted a higher wage and would be a strong proponent of the minimum wage. However I have read and listened to discussions which point out some fallacies of the minimum wage. I do believe the minimum wage reduces the work force due to the cost. I discussed this some in my discussion post but believe that a more expensive worker can be dropped faster than a less expensive worker. I am starting to believe that markets will set prices. Trying to control human behavior and the changing behavior of supply and demand is fraught with discrepancies and miscalculations.

As the rate increases the labor supply increases but the labor force can decrease. The discussion of supply and demand and its correlation to wages and jobs is a very interesting aspect of economics and of the world we live in today.

Read More

Chapter 3 Interdependence and the Gains from Trade

This chapter reinforced the term opportunity cost which is what we give up to get something else. I see this in my life as I struggle with time with my family vs. the time to do certain chores and work such as home or vehicle maintenance. These are things I enjoy doing when I have time which was more prevalent before our child. I have a hard time justifying the time away from the family to repair the car versus the cost of the repair by someone other than me.

International trade is older in this Country than the Country itself. Timber and other products were traded and shipped as soon as possible from the "new" world. It has allowed the United States and other countries to have economic advances which has led us to where we are now with trade. There are many horrific situations occurring in the world from the requirements of international trade and these should be a priority to the consumers and producers, however the global benefits the citizens of many countries have experienced, I believe is worth the cost of trading overseas, land and in the sky. Cultural differences and political unrest are factors to be aware of in global markets along with many other vectors.

I'll continue to try and support my local economy as much as possible by shopping local and supporting the local businesses. I'll also always be looking to support companies and products that reflect and magnify my beliefs and opinions. I do not feel overly concerned that TV's produced in South Korea are cheaper than an American made TV if there even is one. We have chose to not produce TV's and compete with other countries but to use our resources elsewhere in the economy.

I am currently shopping for a laptop and honestly where the computer is made is of little relevance to my final decision. The specs, design and price are the biggest deciding factor to me. I just assume that any decent laptop in the price point I want  could not be built in the US at this time. There are a few companies which do manufacture some products here but the vast majority of laptops are made overseas. I could trade my money, less in the terms of specs or design and get something made in the United States but I do not see any benefit from doing this.

Read More

Chapter 2 Thinking Like am Economist

Salida, Colorado is a small mountain town that exhibits a strong sense of community. And through this sense of community, locals tend to want to help and support the other members of the local economic base. Some studies have shown that a larger portion of every dollar stays in a local community when spent at a local merchant. As a small city Salida merchants often can't compete with larger markers or online marketplaces. 

Limiting factors for goods being sold by local merchants could be the customer base, trends outpacing local sourcing, or greater expense in shipping or supplies among others. These factors would set the production possibilities frontier or PPF limits which could be demonstrated in a graph. For example,consider a ski shop selling ski clothing. High prices would limit purchases but at a higher profit, while lowering the cost sells more suits for less profit.

I think what the economist in the video misses is that buying local doesn't necessarily have to mean locally sourced from sheep to sweater in my opinion. Buying local is choosing to shop at local shops or merchants to buy the things you might buy but not typically in the local marketplace. The local shop is selling the same snowsuit as a larger online or national retailer manufactured in the same factors abroad, but buy buying local you are putting money into the hands of your community and perhaps more of that money stays local and supports the community as a whole.

Efficiency on a PPF graph is producing the correct amount of widgets with the resources available. This is shown graphically when a point of production falls on the PPF line between widgets produced and the resources available.  

Read More

Chapter one

 

1. What in this chapter made you think about an economic concept differently than your previous beliefs?  
2. What new questions do you have now about the US economy based on this chapter?

    Chapter one of the text briefly explained the theory of economics and listed the 10 Principles of Economics. 

I do think of trade the offs in my life decisions, but I do not really use economics theory to understand the decisions I make. This is be fun to start to understand and perhaps change some habits. 

Incentives to shop. That is how the US government is trying to kick start our economy. I listen to Kai Ryssdal on Marketplace and he is always reminding listeners that our economy is based on us consumers, on the shopping we do and the things we buy. I will be interested to see what incentives work in our new economy and which never get of the ground. I am also interested in seeing where the fraud came from and who really benefited from government interventions.

Read More