Tuesday, May 22, 2007

Chapter 13 Homework

Key Question 4
The components of M1 are;
- Currency
- All checkale deposits
The largest component is checkable deposits, by a small margin.
The face value of a coin is greater than its intrinsic value because the recipient is confident that they will be able to exchange the coin for a good of the same value.
Near-monies included in M2 are "certain highly liquid financial assets that do not function directly or fully as a medium of exchange but can be readily converted into curreny or checkable deposits." (McConnell and Brue, 247)
M2 and M3 money supplies are distinguished by their lack of liquidity.

Key Question 6




If instead;


From this, we can draw the conclusion that there is an inverse relationship between the purchasing power of the dollar and the price level.

Key Question 7
The basic determinant for the transactions demand is the level of nomial GDP.
The basic determinant for the asset demand for money is the interest rate.
We can add these two, horizontally, to graphically show the asset demand against transaction demand. The result is a downwards sloping curve. The equilibirum interest rate is then determined at the intersection between this curve and the money supply.
a) the expanded use of credit cards may increase the demand for money, and thus the interest rate will decrease.
b) a shortening of worker pay period may increase the demand for money, and thus the interest rate will decrease.
c) an increase in nominal GDP signals an increase in the demand for money, and thus the interest rate will decrease.

Monday, May 14, 2007

Chapter 12 Homework (Part 2)

7. Key Question
The full-employment budget measures what the Federal budget deficit or surplus would be with existing tax rates and government spending levels if the economy had achieved its full-employment level of GDP in each year. It allows economists to adjust the actualy Federal budget deficits and surpluses to eliminate the automatic changes in tax-revenues.
It can differ from the actual budget if there is economic expansion or recession.

On page 219, figure 12.3, GDP2 reflects a zero deficit or surplus of full-employment budget. To further the country's GDP, I would raise government spending. In terms of the graph, this would cause an upward shift in G.

10. Key Question
The political business cycle is when politicians use expansionary fiscal policy right before an election, and contractionary fiscal policy right after an election, to dampen excessiev aggregate demand.

Thursday, May 10, 2007

Chapter 12 homework : Questions 2 and 3

Multiplier = 1 / (1-0.8)
= 1/ 0.2
= 5

$25 Billion / 5 = necessary government spending

The government must spend $5 Billion to increase the GDP by $25 Billion

To end severe demand pull inflation, contractionary fiscal policy may be in order. To do this, the government would have to decrease public spending, increase taxes, or somehow combine both. This would then cause an inward shift of AD, bringing down the price level.
Someone who would want to preserve the size of the government would increase taxes rather than decrease public spending, and someone who thinks the public sector is too large would do the opposite.

Saturday, May 5, 2007

High Unemployment Rates in Europe - Structural Problems or Deficient Aggregate Demand?

After reading page 207 of McConnell and Brue's "Economics", I have come to the conclusion that the high rates of unemployment in Europe are not solely due to structural problems or deficient aggregate demand.

I find validity in both arguments. The idea that the high amount of social security in Europe, along with union contracts limiting the ways an employer can fire an employee, does indeed discourage workers from taking new jobs, which are not abundant because employers are weary of employing people. This is something I know first hand, as my father would come home with stories of incompetent people he could not fire because of labour laws.
However, the low aggregate demand does not make matters better. Although page 207 does not give this information, earlier in chapter 9, on page 156, we can see a table where the average propensity to consume of USA, Canada, UK, Netherlands, Germany, Italy, Japan and France are displayed. As is suggested by deficient aggregate demand, the mainland European countries had a substantially lower average propensity to consume. This may explain the reason why Europe isn't producing as much. They simply don't need as much.

Rather than state black and white which is the real cause, I would say that the low aggregate demand is what enables the government policies and union contracts to be imposed, without destructive effects to the economy.

The US was able to maintain low levels of inflation, with high levels of GDP and greater than full-employment between the years of 1996-2000, through strong aggregate supply. As the economy expands, represented aggregate demand shifting out and greater than full-employment, the rate of inflation should technically rise. However, seeing as aggregate supply also shifted out, the inflation rate was kept down.