This is the last chapter in the course.  I hope you have enjoyed the course and are saddened to see it end.  What concepts or theories did you find most interesting and/or useful?  Is there an area where you changed your thinking? Re this chapter:  Which debate do you consider most important and interesting?  Which side do you agree with? Why?

This course was really interesting, I learned a lot. I wish I had taken this course over the fall or spring. During the summer makes it a little hard to really grasp all the information and to go in depth about every detail. It definitely change my perspective about the economy and what concepts are essential for a better economy and how our behavior plays an important role. Learning about the importance of trade, learning about GDP (which I did not know anything about), CPI. It was also interesting to know how the Fed makes important decisions about the money.

I found “Should the government balance its budget?” the most appealing and interesting. There are functions that are beneficial and important. However, there is inefficiency from the government, therefore, it could be a reason taxes are high, to compensate that. If there was a decrease in taxes there could be more opportunity for people to save and invest. As we learned, the more people save and invest, the more growth there is in the economy.

Thank you for a great semester. I learned a lot!

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?)
The short run trade-off between inflation and unemployment is if there is inflation, unemployment lowers. The Philip curve proves that there is trade-off between inflation and unemployment. With a higher demand in product, firms raise their prices which results in a higher demand for employment. There is no trade-off in the long run between inflation and unemployment. Consumers will stop purchasing and unemployment will go back to normal rate. It also depends in the time period. The trade-off could last for almost two years. If there is a lower wages or higher interest rate then consumers might purchase less goods, and if they purchase less, the demand for employees will decrease.

How does consumer confidence interact with public policies when in a recession?  How about in a boom?  Does it make policies more effective or less effective in achieving economic stability? Why?

Consumer confidence refers to the level of willingness a consumer has to spend, borrow, and save. A high level of consumer confidence will encourage a higher marginal propensity to consume. If confidence falls because of uncertainty this can have an impact on other variables such as firms will delay investments too. So, if people expect a recession, confidence drops, spending decreases, creating a negative multiplier effect of lower growth and higher unemployment. Increased consumer confidence during an economic boom can push consumption and investments higher.

Consumer confidence can go either way depending on society’s confidence in the Fed’s policies. So, in achieving economic stability, policies become more effective because they can make people be confident therefore, increasing productivity.

This chapter is all about short term fluctuations in the economy – recessions and booms.  After reading the chapter what do you think about the current US (or Colorado) economy? Is a recession coming soon? Why or why not?  Is the economy in danger of overheating? Why or why not? (This is part of why you take economics — to forecast the future.  Economists are notoriously bad at that, but it is still a useful exercise to ensure you understand what might drive changes in the economy.)

To determine if a recession is coming soon, economists look at certain factors like GDP, interests rates, unemployment, and price levels. A recession is pretty much when the economy stops growing and eventually starts shrinking. Also, a decline in the in the gross domestic product growth. GDP is only reported after the quarter is over, by the time it had turned negative, the recession may have already started. If this happens for two consecutive quarters (six months) is when a recession starts.

An overheated economy is one that is expanding at a rate that is unsustainable. One that has also experience a prolonged period of good economic growth Rising rates of inflation are typically one of the first signs that an economy is overheating. Therefore, I do not think the economy is overheating. However, recently I have heard and read that economist predict a recession around the elections of 2020. I would like to read more about that and understand why.

Pretend for  moment you are teaching this class and you need to write questions for an exam covering this chapter.  Write three short answer questions and give 2 answers for each — an adequate response and a very good response.  Your questions should cover highlights from the chapter.  Don’t choose identification or list questions, require some analysis.  A answers are generally longish.

1. How would a budget deficit affect unemployment?
2. What sources supply in the market for loanable funds?
3. Long run affect of a budget deficit?

Answers: 1. Government spending will increase leading to more output. The demand for workers will increase so unemployment falls

2. Business’ Investments or firms, household, and consumers are some. The majority of the demand for loanable funds comes from business firms who borrow money for purchasing or making new capital goods. The second biggest demand comes from individuals who want to borrow for purchasing purposes such as auto loans, appliances, etc.

3. Increases national debt, higher taxes and lower government spending, and increased interest rates to slower economy.

Post your 3 favorite margin notes from this chapter.  Why did you highlight and comment on these particular points in the text? (I know some of you don’t take notes as you read – just jot down three things that you found interesting in the chapter and why.)

This chapter was one of my favorites because it was easy to follow, and it was very interesting. Some of the things I wrote on my notes were The Flow of Goods and how important they are for the economy. Never gave it much thought on how essential this is. Learning that for a better economy there has to be a balanced trade, you would think that whatever brings the more benefit is the better choice, in my case I thought exports were more beneficial. Net capital outflow was also interesting, like I said I never gave it a lot of thought to what was essential for a better economy. I would have not imagined that a negative outflow had to do with domestic residents buying less foreign assets than foreigners are buying domestic assets. I also loved reading about real exchange rates. If I had to read a chapter all over again, it would be this one to grasp more all the important information.

What are the costs of inflation?  Which is most important?  How about deflation?  Would that be a problem and for whom? The FRB worries more about deflation. Why? Do you agree? Why or why not?

For the economy it can lead to lower levels of investment and lower economic growth. For an individual, it can lead to a fall on the value of their savings and their income. People will have to pay higher taxes. The cost of deflation is an increase in interest rates. Reduces employment resulting from wage rigidity, there is also loss of government revenue. It is a problem for the government, businesses and individuals in debt. IT decreases economic growth. People in debt will pay higher interest rates, business owners will have to drop their prices which, will result in less profit. The FRB worries more about deflation because it brings less productivity to the economy and it is a lot harder to reverse.

The phrase “printing money” tends to be tossed around in discussions about the money supply.  How important is cash to the overall money supply?  In our system the Federal Reserve Board has at least some control over the money supply.  How are they related to the Federal government? Recently the FRB has been pushing up interest rates.  Why? 

The money supply is very important because it is all the physical cash circulating throughout the nation, plus the money held in checking and saving accounts. There are two ways that The Fed measures money supply: M1 and M2. A basic economy theory teaches that an increase in the money supply leads to higher prices. Federal fund rates is used to attempt to control inflation. By increasing the federal funds, the Fed basically attempts to shrink the money supply available to make purchases, therefore, making money more expensive to obtain.

Why will there always be at least some unemployment?  Give an example of a public policy that affects the unemployment rate.  Is it positive or negative? Why?

Although it is not preferrable that unemloyment rate lowers to 0% there is always at least some. There are three types of unemployment: cyclical, frictional, and structural.

Cyclical pretty much occurs when a company goes bankrupt, therefore, people need to look for another job. Frictional occurs when someone is not happy at their current job so he/she leaves and starts looking for a different job or people in the process of relocating in a different state. Finally, structural results when there is not much demand from the type of job someone can perform. For instance, a plumber cannot find a job because there is not many job opportunities available.

A public policy that affects the unemployment rate is unemployment insurance. It creates negativity because people are less motivated to work since they are receiving an amount of money while they are not working.

 

In what ways do unions affect the natural rate of unemployment? How about human resource regulations, such as safety or age-based rules?  Do all of these affect the cost of hiring employees? Should the affect of a regulation on employment be considered as a part of the adoption process? Why or why not?

If unions raise the wage and employers cannot pay, then, unemployment will decline.

Refusing to hire an elderly is considered discrimination and its against the law. Human Resource’s regulations affect the cost of hiring employees because it costs money to the company. It also affects because not everyone is in the same age range, and skill set. They have to run a background check, the training process is expensive, etc. It should be adopted because it would be easier for companies.

Have you considered the trade-off between risk and return when making an investment?  Did it change your investment? Do you expect a risk premium related to the level of risk? 

Yes, in every investment there is always a risk of losing. I think that is why not many people are always willing to invest on something. I would evaluate the rate of return and the rate of risk and sum it in the amount that would not affect me if I were to lose it. I would first do a research about about the risk premium and look at the prediction and then make a decision.

Why is the present value of a dollar more valuable than its future value?
One of the main reasons is because the money we have today can be invested to turn into more money in the future. Also, like the book mentioned, there is the risk that the money we were supposed to receive in the future is not paid to us.