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.