This class was very helpful for me in giving me an idea of what I might expect for later classes, such as microeconomics. One thing I enjoyed learning about was international trade and tariffs because that was very relevant to today’s politics, and while I don’t usually discuss adult things such as politics with my friends, it’s helpful because it’ll help me understand what they’re talking about on the news better, which will make me feel like more of an adult. One area in which I changed my thinking was in the idea of “buy local.” I used to think the main reason to buy local was to support the economy, and now I understand that we need products from the outside coming in or the economy just wouldn’t work very well. I know understand the reason to buy local honey isn’t necessarily to support the local economy but because I simply prefer honey from Colorado.

The debate I consider most important was the one about policy makers trying to stabilize the economy. If we know the economy is going to fluctuate if left alone, then it just makes sense to me that the biggest question is should we mess with it to try to stabilize it? Or would that just bring human error into the equation and not be worth it?

I personally think policy makers should not try to stabilize the economy. It seems to me that, because of the time it takes for monetary and fiscal policies to actually have an effect on the economy and because the situation may be different by then, there’s not use in even trying to use an economic forecast that is highly imprecise. That’s just not how something as serious as the economy should be tampered with.

What is happening in the world today shows a short-run effect that unemployment has on inflation – because so many people are being laid off, prices seem to be going down. This, however, is not something done by policymakers but by a virus. These stimulus checks are an example of how strongly policymakers believe in this short-run trade-off idea; the belief is that the economy will be stimulated through all these people spending all this money and therefore getting the ball rolling again, hopefully putting people back to work and shifting the AD curve back to the right.

If, however, policymakers are wrong and there is in fact no correlation, say the crowding-out effect plays a role in this, then that would mean that people are in fact spending their stimulus checks, but because it’s so much money being spent all at once, prices and interest rates may shoot back up quickly to keep up with spending, and this puts us back at square one. And that’s why there is only a short-run trade-off. Eventually, much like Milton Friedman told us, the inflation rate will keep rising regardless of unemployment rate. If policymakers want to decrease a large percentage of unemployment, they have to be careful not to set off a rate of inflation that can eventually cost much more damage to the economy than to begin with.

Public policies essentially influence the Confidence in consumers, both in booms and recessions. If the AD curve shifts to the left, for example, The Fed can increase the money supply and lower interest rates to push the AD curve back to the right. In the case of an overheating economy, The Fed can contract the money supply, which raises interest rate and shifts the AD curve to the left.

Fiscal policy can also influence the AD curve in the short run. While in monetary policy, the Fed indirectly influences spending decisions of consumers, the government changing its own purchases of goods and services affects the AD curve directly under fiscal policy.

Policies can be very effective in achieving economic stability, however the crowding out effect tells us that government spending could have a negative unwanted effect on the AD curve by putting downward pressure on it via higher interest rates.

A recession is coming soon if it hasn’t already hit the starting point. People are being told to stay in their homes and only go out for the essentials, which means a sudden change in consumption. Less consumer spending will then lead to a shift to the left in the AD curve, and it’s not just from consumers. Firms will see this happening and cut back drastically on investment, which will be another hit on the AD curve that will shift it even further left. This is also putting people out of work, raising the natural unemployment level and shifting the short-run AS curve to the left. Such a drastic downturn in economic activity no doubt leads to a recession, as it did in 2008. The economy as of today is already beginning to see a fall in price levels and output, as firms are pessimistic about the future and are letting go of employees and incomes are falling.

The near future is not difficult to predict; it is going to be a bumpy ride to say the least. What we do to get out of this recession after the virus is what really counts, and what will determine how long it will take the economy to the point where it gets used to the lower wages and prices and therefore starts hiring again, bringing us back to the long-run AS.

Q1: How is the equilibrium of interest rates naturally reached for loanable funds?

Adequate Response: This equilibrium is reached by the amount of people who want to save exactly balancing with the desired quantities of domestic investment and net capital outflow.

Very Good Response: For the equilibrium to be reached, the amount of people who want to safe would need to be perfectly balanced with the amount of desired domestic investments and net capital outflow. Of course, it is impossible for this to happen naturally, however that equilibrium point must still be reached. The way this happens is very simple: if the interest point is below the equilibrium, the quantity of loanable funds supplied is less than the quantity demanded. In turn this makes the interest rate rise and discourage demand. If the interest rate was above the equilibrium, the quantity of loanable funds would exceed the demand and the excess fund would drive the interest rates downward, encouraging more demand.

Q2: How is the equilibrium for foreign-currency exchange naturally reached, and how is this idea similar to the previous?

Adequate Response: When the real exchange rate appreciates, the goods from that country become more expensive and therefore less attractive in both the foreign and domestic markets. This is similar to the previous question because it’s a cause and effect system for supply and demand.

Very Good Answer: Similar to the previous answer, this one deals with the perfect balance of supply and demand, except in this case, we are looking at the foreign currency exchange. The thing that keeps it balanced is the real-exchange rate, similar to the effect that the real interest rate has in the market for loanable funds. The net capital outflow does not depend on the real exchange rate due to the cost of purchasing dollars back if you earn dividends in a foreign currency.

Q3: What might be some positives about being in trade deficit with a country like China?

Adequate Answer: Some positive things may be a stronger currency and the consumption of advanced technologies.

Very Good answer: While the ideal situation to be in would probably be a more balanced one, being in a trade deficit allows the U.S. to have the upper hand in negotiations, for example being in deficit with China could justify placing tariffs on goods. Another benefit is that U.S. consumers enjoy of many technologies made in China that are being exported instead of kept domestic, which allows consumers to get these technologies at lower prices than they would if they were manufactured here.

One thing I found interesting in this chapter was how much bigger of a percentage imports are to this country’s GDP compared to exports. I know we import much more from China than we export to them, but I guess I just thought that we were also exporting a lot more to other countries than they import from us. This is clearly not the case; as Figure 1 shows, imports have essentially mirrored exports for about the past 15 years, which tells me when that when the U.S. exports something, an import into the country is part of that same deal except on a much bigger scale, which is why we see that import number getting bigger.

Another thing I found interesting was the different factors in history that have contributed to the country’s “debt.” It’s not as simple as pointing out one thing that could have caused trade deficit; there may have been certain things to trigger it like President Ronald Regan’s defense spending, a boom where companies were investing, and a decrease in both saving and investment, but there’s many other factors that have played a role in this debt. Even within the economic events that triggered it, there are even more economic events within those to consider, which is one of the things that can make the economy so complex to understand: there’s so many layers.

A third thing I found interesting in this chapter was the purchasing-power parity because this is something I’ve had to learn about since a very young age. When I would travel to Mexico I would ask why we paid so many Pesos for everything, and I was always explained that a peso is worth far less than a dollar. Of course, once I got old enough to understand this concept, I realized many things in Mexico are actually cheaper in Mexico because of the amount of Pesos I can get with a dollar. One other reason I’ve learned this parity isn’t accurate is because of the wages paid in those countries; it may seem to us that they’re just really cheap places to live, but when you actually live there the wages are very low and that’s why there’s so much poverty.

The costs of inflation include the shoelather costs, menu costs, tax distortions, costs of confusion and inconvenience, and arbitrary distribution of wealth. They’re all important, but the one that probably most affects people worldwide is arbitrary distributions of wealth. Because most countries have high rates of inflation, they are unpredictable and cause unexpected inflation. This is bad for those who take out a loan and then over the years there’s deflation instead of inflation, meaning their wages may be lowered and they’ll have no way of paying the interests on their loans.

Deflation could be a problem because it’s unpredictable, and it mirrors the same costs that inflation has except for shoeleather costs, which economist Milton Friedman believed was a good thing for thing for the economy. What he didn’t take into consideration was the lower wages people would be receiving and the higher unemployment rates. I agree that the FRB should worry about deflation more than inflation because inflation has been the norm, while deflation has proven to be a symptom of greater economic issues. It can affect not only the people paying high levels of interests rates with lower wages but also those who are laid off because businesses haven’t adjusted to lower prices and have been struggling in sales, and it can potentially create a dangerous cascading effect that leads to something nobody wants such as a depression.

Cash is very important to the overall money supply, although that is definitely becoming less the case in this country. When I was a manager at my local Little Caesar’s Pizza, I was in charge of counting the money at the end of the day, and most of the time, over half of the purchases were made with credit/debit cards. The Federal Reserve has a certain amount of control over the money supply, which should technically only be limited by two other factors: the amount of money households chose to hold as deposits in banks, and the amount that bankers chose to lend. The only relationship between the Federal Reserve and the Government should be that the Fed was created through an act of Congress, but other than that, the Federal Reserve banks are essentially private corporations. How corruption might play a role in that system, however, is unknown.

If the FRB changes the money supply by dropping interest rates, this means they are looking for more economic movement because they may be seeing it slow down. I agree that it is one of the best tools they can use to boost the economy, especially in times like these when people are being laid off due to the virus and many aren’t spending their money other than on toilet paper and other “essentials”.

I don’t believe the FRB should have more accountability to congress; there’s a reason why it was created to be insulated from politics and it should probably stay that way. If Donald Trump had the ability to fire the Chair of the Federal Reserve, whoever got the job next would fear going against anything the President wants, assuming all that power to the President rather than themselves. We can see how this would quickly create a disaster full of corruption and many American people would be very angry.

There will always be some unemployment due to a couple of reasons. First, frictional unemployment means there will always be people transitioning jobs and it takes time for them to find the right fit, so they will account for unemployment. Second, if there’s more labor supplied than demanded, this causes unemployment by what’s called structural unemployment. Lastly, job search causes unemployment by leaving laid-off workers having to find not just any job but one that will fit their skills. A public policy that affects the unemployment rate is raising the minimum wage above the equilibrium point of labor demanded and labor supplied. This is negative because it leaves people who would be willing to accept the lower wage out of work and also causes inflation.

Unions affect the rate of unemployment by raising wages for union workers and therefore causing a surplus in labor, leaving some without work. This means that those working are better off but those who aren’t are worse off.

When I first started learning about investing my money and this whole idea of not putting all my eggs in the same basket was when I got my first job in high school, so I didn’t have very much money. I downloaded an app called Acorns, which takes round-ups off of purchases and starts putting them in a very diversified portfolio. When I started this, I put about 100 dollars to start it and just watched it grow. I remember it took quite a while just to earn 20 dollars in my investments, but I also just kept adding money into it whenever I could because I essentially just see it as a savings account for the future. I now have 3,000 dollars give or take. It has taken quite a while to get there, but I took basically no risk because my money is so diversified.

My investment hasn’t changed since the day I started it in high school. I like the idea of low-risk low-reward because I know my money’s probably not going anywhere, and even though it’s hardly growing, it’s still something. Of course, if I started taking bigger risks by investing more money into one stock or something of the sort, then naturally I would expect earnings related to the level of risk, so higher-risk higher-rewards. The reason I don’t do this, however, is because I know myself well enough to know that I would just be worrying about losing my money and the stress related to it would not be worth it at all.

The reason the present value of a dollar is greater than its future value is because if you get that same amount of money now, you can save it and grow it through interests, which makes it a larger quantity of dollars in the future when the inflation rate is higher. If you accept that same dollar amount but at a later date, then during that time that you didn’t have it, you weren’t able to grow it, so it’s worth less.