Journaling of Chapter 35: The Short-Run Trade-off between Inflation and Unemployment

Chapter 35, titled ‘The Short-Run Trade-off between Inflation and Unemployment’, explains why policymakers face a short-run trade-off between inflation and unemployment. However, this inflation-unemployment trade-off disappears in the long run. This chapter also discusses how supply shocks can shift the inflation-unemployment trade-off. Readers also learn that there is a short-run cost of reducing the rate of inflation. The costs of reducing inflation are also affected by policymakers’ credibility.

            Since both inflation and unemployment are undesirable, the sum of inflation and unemployment has been termed the misery index. In the short run, inflation and unemployment are related because an increase in aggregate demand the short-run trade-off between inflation and unemployment temporarily increases inflation and output while it lowers unemployment. The Phillips curve shows the combinations of inflation and unemployment that arise in the short run as shifts in the aggregate-demand curve move along a short-run aggregate-supply curve. The long-run Phillips curve should be vertical at the natural rate of unemployment—the rate of unemployment to which the economy naturally gravitates. For any given expected inflation rate, if actual inflation exceeds expected inflation, unemployment will fall below the natural rate by an amount that depends on the parameter a. However, in the long run, people learn to expect the inflation that actually exists, and the unemployment rate will equal the natural rate. The chapter then goes on to explain the role of supply shocks as well as the cost of reducing inflation. Overall, I would give this chapter a difficulty rating of 2 out of 3. 

Journaling of Chapter 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

                Chapter 34, titled ‘The Influence of Monetary and Fiscal Policy on Aggregate Demand’, talks about the short-run effects of monetary and fiscal policies. Chapter 34 is the second chapter that concentrates on short run fluctuations in the economy around its long-term trend.  It also addresses the theory behind stabilization policies and some of the shortcomings of stabilization policy. The interest rate is a key determinant of aggregate demand. Interest rate is determined by the supply and demand for money. The interest rate is the opportunity cost of holding money. In the long run, the interest rate is determined by the supply and demand for loanable funds. In the short run, the interest rate is determined by the supply and demand for money. Fiscal policy refers to the government’s choices of the levels of government purchases and taxes. While fiscal policy can influence growth in the long run, its primary impact in the short run is on aggregate demand. The other half of fiscal policy is taxation. Finally, there are arguments about whether the government should actively use monetary and fiscal policies to stabilize aggregate demand and, as a result, output and employment. Both sides agree that, in theory, activist policy can stabilize the economy. However some feel that, in practice, monetary and fiscal policy affects the economy with a substantial lag. Automatic stabilizers are changes in fiscal policy that automatically stimulate aggregate demand in a recession so that policymakers do not have to take deliberate action.

                Overall, I would give this chapter a difficulty rating of 2 out of 3. 

Journaling of Chapter 33: Aggregate Demand and Aggregate Supply

Chapter 33 introduces aggregate demand and aggregate supply and shows how shifts in these curves can cause recessions. Chapter 33 also develops some of the actions that policymakers undertake to offset these recessions. This chapter focuses on the economy’s short-run fluctuations around its long-term trend. Three key facts about economic fluctuations are that economic fluctuations are irregular and unpredictable, most macroeconomic quantities fluctuate together, and as output falls, unemployment rises. In the short run, nominal and real variables are not independent. As a result, in the short run, changes in money can temporarily move real GDP away from its long-run trend. The aggregate demand curve shows the quantity of goods and services households, firms, the government, and customers abroad wish to buy at each price level. It slopes negatively. The aggregate supply curve shows the quantity of goods and services that firms produce and sell at each price level. It slopes positively (in the short run). There are two basic causes of a recession: a leftward shift in aggregate demand and a leftward shift in aggregate supply.  

Overall, I would give this chapter a difficulty rating of 2 out of 3. The class has already been introduced to demand and supply so that helps out a little bit. Since this chapter focuses on recessions for part of it, I would also like to know about booms in the aggregate demand and aggregate supply curve.  

Article Review 9: The Silver Age of the Central Banker

This week’s article is provided by Salient Partners. The author claims that we have moved on from the Golden Age of the Central Banker to the Silver Age of the Central Banker. The Golden Age was when many market participants believed that central bankers were responsible for all market outcomes. The Silver Age of the Central Banker is the demise of the golden age of the central banker. Global central bank coordination is now widespread and begins the new era. Monetary policy is now facing a structural change as it becomes more and more influenced by each nation’s domestic politics. For instance, there have been major declines in export volumes shared by every major economy on Earth. Thus, this points to the fact that the U.S is currently in a recession. Despite the fact that this is just a mild recession, also termed as a earnings recession, the fact of the matter is that this recession is getting worse. The author believes that the problem is that monetary policy leaders are partaking in a strategic interaction. However, they’re playing the Coordination Game instead of the Competition Game. The Coordination Game is like a Stag Hunt, when there’s mutual cooperation to create a stable outcome. The Cooperation Game is like the Prisoner’s Dilemma, which when played successfully gives an extraordinary payoff. The foundations for this shift were easily explained through historical precedents and game theory which made for a fascinating read that was easy to follow. 

Journaling of Chapter 32: A Macroeconomic Theory of the Open Economy

     Chapter 32, titled 'A Macroeconomic Theory of the Open Economy' helps establish the interdependence of a number of economic variables in an open economy. Chapter 32 specifically demonstrates the relationships between the prices and quantities in the market for loanable funds and the prices and quantities in the market for foreign-currency exchange. Using these markets, readers are taught how to analyze the impact of a variety of government policies on an economy’s exchange rate and trade balance. This chapter constructs a model of the open economy that allows readers to analyze the impact of government policies on net exports, net capital outflow, and exchange rates. This model is based on the previous long-run analysis that we learned in two ways. First, one must assume that output is determined by technology and factor supplies so output is fixed or given. Second of all, prices are determined by the quantity of money so prices are fixed or given. The model constructed in this chapter is composed of two markets—the market for loanable funds and the market for foreign-currency exchange. These markets simultaneously determine the interest rate and the exchange rate, as well as the level of overall investment and the trade balance.

     Overall, I would give this week's chapter a difficulty rating of 2 out of 3. The three policy problems demonstrated in the text take a lot of concentration to understand so that is something I am having a hard time with. I also don't comprehend why capital flight is considered bad for the economy rather than good if it raises net exports.

Journaling of Chapter 31: Open-Economy Macroeconomics: Basic Concepts

Chapter 31, titled ‘Open-Economy Macroeconomics: Basic Concepts’ develops the basic concepts and vocabulary associated with macroeconomics in an international setting: net exports, net capital outflow, real and nominal exchange rates, and purchasing-power parity. Readers learn why a nation’s net exports must equal its net capital outflow. The chapter also addresses the concepts of the real and nominal exchange rate and develops a theory of exchange rate determination known as purchasing-power parity. It discusses the study of macroeconomics in an open economy: an economy that interacts with other economies. An open economy interacts with other economies in two ways: It buys and sells goods and services in world product markets, and it buys and sells capital assets in world financial markets.

Exports are domestically produced goods and services sold abroad while imports are foreign-produced goods and services sold domestically. Net exports are the value of a country’s exports minus the value of its imports. Net exports are also called the trade balance. Net capital outflow (also called net foreign investment) is the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners. Net capital outflow (NCO) equals net exports (NX): NCO = NX. Another formula is S = I + NCO. Saving = Investment = Net capital outflow. The nominal exchange rate is the rate at which people can trade one currency for another currency. An exchange rate between dollars and any foreign currency can be expressed in two ways: foreign currency per dollar or dollars per unit of foreign currency. The simplest explanation of why an exchange rate takes on a particular value is called purchasing-power parity. This theory says that a unit of any given currency should buy the same quantity of goods in all countries. Also, e = P*/P which means if purchasing-power parity holds, the nominal exchange rate is the ratio of the foreign price level to the domestic price level.

Overall, I give this chapter a difficulty rating of 2 out of 3. 

Article Review 8: Simple Janet – The Monetary Android With a Broken Flash Drive

In this week’s article titled, ‘Simple Janet – The Monetary Android With a Broken Flash Drive,’ features David Stockman criticizing the actions of another economist as per usual. This time around he is attacking Janet Yellen. Janet Yellen is the head of the Federal Reserve. He believes she’s wrong about her thoughts on negative interest rates to promote economic growth. Though a bunch of things economic-wise have gone wrong, Yellen fails to report these instances and instead claims that the number of jobs being created has risen. However, Stockman says that we are at Peak Debt, along with most of the world.

Stockman uses the evidence of how household, mortgage, and credit card debt is already experiencing a negative growth without negative interest rate policy so negative interest rates would not help the situation ate all. Since the financial crises, there has actually been a display of negative growth in household debt. Stockman refers to our current situation with ZIRP, the zero interest rate policy and states that negative interest rates would only make our economy much worse. Despite this, Yellen believes it doesn’t matter that the Fed is falsely inflating equity markets. Her plan to fix the bursting bubble is to reflate it. Overall, Stockman basically bashes the Fed for their stupidity and sees a great deal of problems we may encounter if the negative interest rate policy would be implemented.