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
D=1/P
D=1/1.25
D=0.8
If instead;
D=1/0.5
D=2
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.
Tuesday, May 22, 2007
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.
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
2.
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
3.
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.
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
3.
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?
1)UNEMPLOYMENT IN EUROPE
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.
2)US 1996-2000 ECONOMIC GROWTH WITH LOW INFLATION
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.
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.
2)US 1996-2000 ECONOMIC GROWTH WITH LOW INFLATION
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.
Monday, April 30, 2007
Chapter 11 Homework
Key Quesiton 4
a) Equilibrium: $300 Billion. It is not neccesarily the full employment level of output, because the output has to be compatible with the demand.
b) These price levels will not be equilibrium because the amount of real GDP demanded and supplied do not match.
c) Some factors of aggregate demand are;
- consumer wealth,
- taxes,
- consumer expectations
- real interest rates
Key Question 5
a) Productivity
a) Equilibrium: $300 Billion. It is not neccesarily the full employment level of output, because the output has to be compatible with the demand.
b) These price levels will not be equilibrium because the amount of real GDP demanded and supplied do not match.
c) Some factors of aggregate demand are;
- consumer wealth,
- taxes,
- consumer expectations
- real interest rates
Key Question 5
a) Productivity
Thursday, April 26, 2007
Save Your Money At 4.25% - Charles Schwab's Formula To Success
Going after 'lazy money' with 4.25% checking
In his article, Mr. Charles Schwab has offered consumers an incredible deal; to deposit their money in his bank with 4.25% interest, no ATM costs, and free checking. Good deal, right? But as the article points out, "With the average interest-checking account now yielding only 2 percent, you wouldn't think Schwab would have to double that to make a splash."
Schwab identified that there is a lot of "lazy money" in the market: money that people want to invest, and watch 'grow'. With his interest rate at twice that of the average, he is attracting a lot of this money.
Consumers have two options;
1) Place the money in the bank (like Schwab's) and gain profits on the interest, or
2) Invest the money stocks and bonds and risk profit or loss or invest in capital.
The opportunity cost of putting the money in the bank is that you forego a potentially higher return in the stock market or wherever you have invested the money. The opportunity cost of investing the money is that you forego the stable, assured interest rate return.
Looking at the graph, where "The Y-axis represents the real interest rate, and since an increase in the real interest rate makes households and firms want to place more money in the bank (and more money in the bank means more money to loan out), there is a direct relationship between real interest rate and Supply of Loanable Funds," (Mr. Welker's Blog (Welker's Wikinomics)).
The direct relationship between the real interest rate and the Supply of Loanable Funds means that as the real interest goes up, as has happened in this article, so will the amount of money that people place in the banks. In other words, the higher interest rate means that people would rather place their money in Mr. Schwab's bank, than invest it. In addition to the costumers gained as transfers from other banks, due to the higher interest rate, this can account for Charles Schwab's success.
In his article, Mr. Charles Schwab has offered consumers an incredible deal; to deposit their money in his bank with 4.25% interest, no ATM costs, and free checking. Good deal, right? But as the article points out, "With the average interest-checking account now yielding only 2 percent, you wouldn't think Schwab would have to double that to make a splash."
Schwab identified that there is a lot of "lazy money" in the market: money that people want to invest, and watch 'grow'. With his interest rate at twice that of the average, he is attracting a lot of this money.
Consumers have two options;
1) Place the money in the bank (like Schwab's) and gain profits on the interest, or
2) Invest the money stocks and bonds and risk profit or loss or invest in capital.
The opportunity cost of putting the money in the bank is that you forego a potentially higher return in the stock market or wherever you have invested the money. The opportunity cost of investing the money is that you forego the stable, assured interest rate return.
Looking at the graph, where "The Y-axis represents the real interest rate, and since an increase in the real interest rate makes households and firms want to place more money in the bank (and more money in the bank means more money to loan out), there is a direct relationship between real interest rate and Supply of Loanable Funds," (Mr. Welker's Blog (Welker's Wikinomics)).
The direct relationship between the real interest rate and the Supply of Loanable Funds means that as the real interest goes up, as has happened in this article, so will the amount of money that people place in the banks. In other words, the higher interest rate means that people would rather place their money in Mr. Schwab's bank, than invest it. In addition to the costumers gained as transfers from other banks, due to the higher interest rate, this can account for Charles Schwab's success.
Wednesday, April 25, 2007
Infinite Growth Cannot Occur In A Finite Environment
In his recent posting, Mr. Welker made a reference to Julian Simon, an economist who claimed that infinite growth can occur in a finite environment due to constant technological progresses. This is in direct contradiction to several laws of physics, as we are already quickly approaching the limits of nano-technology, where nano-chips will become the size of atoms. Surely a piece of technology cannot be much smaller than an atom? Without getting into the details of science and technology, it is safe to say that E.F. Schumacher was correct in saying that "the illusion of unlimited powers, nourished by astonishing scientific and technological achievements, has produced the concurrent illusion of having solved the problem of production." (From his book "Small Is Beautiful"; Chapter 1, The Problem Of Production) He previously attempted to explain our obsession with technological advancements by stating the obvious which is seldom taken acknowledged or taken into consideration; "modern man does not experience himself as a part of nature but as an outside force destined to dominate and conquer it."
I could continue quoting Schumacher on his well-presented and argued ideas on how with nature "we are dealing with [irreplaceable] capital and not with income", and that we should allocate more time and attention to "improve 'the quality of life' and not merely ... increase the quantity of consumption." But this would only touch on the larger problem, a problem which, I feel, Mr. Welker has, knowingly or not, hit at its core.
"As Marco says, “we should not only perceive the world in terms of economics”. On this point I could not agree with him more. Indeed, economics may not provide you or me with answers to life’s most basic questions, like where I’ll go when I die; but one question this imperfect science will help answer is how will my basic needs be met while I’m here on this earth burdened with the curse of scarcity? The answer? Markets. Alas, the invisible hand of which Smith spoke may not be that of God, rather that of the Almighty Dollar."
Mr. Welker here claims that man's basic needs need to be met, and that markets solve this problem. True, markets have been around since the beginning of time, back to the Mesopotamians trading fish. But consider that man's basic needs; shelter, food, the various psychological needs of man, and their self-esteem, are not always tended to by the profit-maximizing methods of today. With large businesses following Adam Smith's principle of specialization, self-esteem is attacked. With corporations setting up shop in the less-developed world, they are still doing no favours for the people's self-esteem, and their exploitation is hurting the basic needs of the other three. Indeed, poor nourishment is not uncommon among sweatshop workers, as is lack of proper housing. That's right, a shanty town is not proper housing. And remind me again where the profits go?
Looking at much of the so-called 'developed world' (believe it or not, there is starvation and lack of proper shelter in the USA.), we have already achieved our basic needs. We also sustain-ably maintain them. What do we do now? The emerging trend is that of material accumulation. We have now become obsessed with how much we have. It cannot be articulated much better than E.F. Schumacher himself, who writes "It is no accident that successful businessmen are often astonishingly primitive; they live in a world made primitive by this process of reduction [where the sole goal in life is profit]," in the chapter "Socialism" of his book "Small Is Beautiful".
This is the problem that economics has created. It does not take into account whether "a particular action is conducive to the wealth and well-being of a society, whether it leads to moral, aesthetic, or cultural enrichment." Given, many governments attempt to maintain a certain degree of aesthetic beauty by giving scholarships to artists, and banning the destruction of old buildings, but the reason why the government intervention is necessary is that otherwise people would only pursue profits. True, government will always be necessary, I am not that naive, nor inclined to think that way. But the amount of purely profit-seeking activities going on in the world is really astonishing. Perhaps it shows not something wrong with economics as a field of study, but perhaps it highlights something inherently wrong with the way economics is being used, and thus the society of today, where we abuse everything we can to make money.
I could continue quoting Schumacher on his well-presented and argued ideas on how with nature "we are dealing with [irreplaceable] capital and not with income", and that we should allocate more time and attention to "improve 'the quality of life' and not merely ... increase the quantity of consumption." But this would only touch on the larger problem, a problem which, I feel, Mr. Welker has, knowingly or not, hit at its core.
"As Marco says, “we should not only perceive the world in terms of economics”. On this point I could not agree with him more. Indeed, economics may not provide you or me with answers to life’s most basic questions, like where I’ll go when I die; but one question this imperfect science will help answer is how will my basic needs be met while I’m here on this earth burdened with the curse of scarcity? The answer? Markets. Alas, the invisible hand of which Smith spoke may not be that of God, rather that of the Almighty Dollar."
Mr. Welker here claims that man's basic needs need to be met, and that markets solve this problem. True, markets have been around since the beginning of time, back to the Mesopotamians trading fish. But consider that man's basic needs; shelter, food, the various psychological needs of man, and their self-esteem, are not always tended to by the profit-maximizing methods of today. With large businesses following Adam Smith's principle of specialization, self-esteem is attacked. With corporations setting up shop in the less-developed world, they are still doing no favours for the people's self-esteem, and their exploitation is hurting the basic needs of the other three. Indeed, poor nourishment is not uncommon among sweatshop workers, as is lack of proper housing. That's right, a shanty town is not proper housing. And remind me again where the profits go?
Looking at much of the so-called 'developed world' (believe it or not, there is starvation and lack of proper shelter in the USA.), we have already achieved our basic needs. We also sustain-ably maintain them. What do we do now? The emerging trend is that of material accumulation. We have now become obsessed with how much we have. It cannot be articulated much better than E.F. Schumacher himself, who writes "It is no accident that successful businessmen are often astonishingly primitive; they live in a world made primitive by this process of reduction [where the sole goal in life is profit]," in the chapter "Socialism" of his book "Small Is Beautiful".
This is the problem that economics has created. It does not take into account whether "a particular action is conducive to the wealth and well-being of a society, whether it leads to moral, aesthetic, or cultural enrichment." Given, many governments attempt to maintain a certain degree of aesthetic beauty by giving scholarships to artists, and banning the destruction of old buildings, but the reason why the government intervention is necessary is that otherwise people would only pursue profits. True, government will always be necessary, I am not that naive, nor inclined to think that way. But the amount of purely profit-seeking activities going on in the world is really astonishing. Perhaps it shows not something wrong with economics as a field of study, but perhaps it highlights something inherently wrong with the way economics is being used, and thus the society of today, where we abuse everything we can to make money.
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