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. 

Journaling of Chapter 30: Money Growth and Inflation

This chapter teaches the readers about money growth and inflation. It specifically establishes the strong relationship between the rate of growth of money and the inflation rate. It discusses the causes and costs of inflation. Though there are numerous costs to the economy because of high inflation it seems like there’s no clear stand on how important costs are when the inflation is only moderate. Inflation is an increase in the overall level of prices. Deflation is a decrease in the overall level of prices. Hyperinflation is extraordinarily high inflation. Inflation is caused when the government prints too much money. Inflation is more about the value of money than about the value of goods. If P represents price level then 1/P is the value of money measured in terms of goods and services. The value of money is determined by the supply and demand for money. Money supply and money demand need to balance for there to be monetary equilibrium. The quantity theory of money is that (1) The quantity of money in the economy determines the price level, and (2) an increase in the money supply increases the price level. Subtle costs of inflation include shoeleather costs, menu costs, relative-price variability and the misallocation of resources, and inflation-induced tax distortion.

Overall, I would give this chapter a difficulty rating of 2 out of 3. I am still a little confused on how the Fisher effect actually says that the nominal interest rate adjusts one-for-one with expected inflation. But other than that, the chapter was fine. 

Journaling of Chapter 29: The Monetary System

                Chapter 29 is titled as ‘The Monetary System’.  It deals with money and prices in the long run. It also describes what money is and develops how the Federal Reserve controls the quantity of money. First, we learn about the meaning of money. Money is the set of assets commonly used to buy goods and services. There are three functions of money: serves as a medium of exchange, serves as a unit of account, and serves as a store of value. Money can be divided into two fundamental types—commodity money and fiat money. Commodity money is money that has “intrinsic value.” Ex. Gold. Fiat money is money without intrinsic value. Ex. Dollar bills. In the United States, we calculate multiple measures of the money stock, two of which are M1 and M2. Next, we discuss the Federal Reserve System. The Federal Reserve (Fed) is the central bank of the United States. It is designed to oversee the banking system and regulate the quantity of money in the economy. We also learn that the public can hold its money as currency or demand deposits. Since these deposits are in banks, the behavior of banks affects the money supply. In the FYI, we also learn about federal funds rate which is the interest rate banks charge each other for short-term loans.

                Overall, this chapter helped me develop an understanding of what money is, what forms money takes, how the banking system helps create money, and how the Federal Reserve controls the quantity of money. I would give it a difficulty rating of 2 out of 3.  

Article Review 7: Counting The Workers The BLS Doesn’t Count – The 2014 Unemployment Rate Was Actually 11.4%

This week’s article, titled ‘Counting The Workers The BLS Doesn’t Count – The 2014 Unemployment Rate Was Actually 11.4%’ by Diana Furchtgott-Roth, is about the steady decline of the labor force participation rate. This happens despite the fact that over the past few years, the U.S has experienced slow but steady economic growth. The participation rate is currently at 62.7%. This contributes to why unemployment rates seem deceivingly low. Unemployment rates seem lower because more and more people are continuing to drop out of the labor force. The people who drop out vary from prime-aged men to women to young people in general. The reason for less younger people being in the labor force is not because they are in school. Enrollments in high school, college, or university have not changed by a significant amount over the past few years. Instead, what Furchtgott-Roch believes is the cause for the lower labor participation rate is because it is now better to not work than have a job. More people are eligible for government provided food stamps, health care, and there are now greater disability benefits. There are also fewer jobs since minimum wage laws have become stricter. A decreasing labor participation rate is important because it leads to slower GDP growth. The solution is to put less power in the federal government and more power into the state government. States can better decide which citizens are deserving of aid.

Overall, this article was an easy read, especially when compared to other articles we’ve been assigned. This heavily relates to what we’re currently learning in class and I agree with the author on many of her main points.