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. 

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. 

Journaling of Chapter 28:Unemployment

Chapter 28, titled ‘Unemployment’, introduces us to the labor market. We see how economists measure the performance of the labor market using unemployment statistics. It also addresses a number of sources of unemployment and some policies that the government might use to lower certain types of unemployment. The Bureau of Labor Statistics (BLS) uses the Current Population Survey to categorize all surveyed adults (age 16 and older) as employed, unemployed, or not in the labor force. BLS then computes labor force = number of employed + number of unemployed, unemployment rate = (number of unemployed/labor force) × 100, and labor-force participation rate = (labor force/adult pop.) × 100. Evidence suggests that most spells are short term, but most unemployment at any given time is long term. Job search is the process of matching workers and jobs. Minimum-wage laws are one source of structural unemployment. Recall that minimum-wage laws force the wage to remain above the equilibrium wage. If a wage is held above the equilibrium level, the result is unemployment. A union is a worker association that engages in collective bargaining with employers over wages, benefits, and working conditions. A union is a cartel because it is a group of sellers organized to exert market power. The theory of efficiency wages suggests that firms may intentionally hold wages above the competitive equilibrium because it is efficient for them to do so.

Overall, I would give this chapter a difficulty rating of 2 out of 3. The concepts aren’t particularly hard but there’s a lot of subject matter to cover. So as of right now, it’s a little difficult to fully comprehend everything. 

Journaling of Chapter 27: The Basic Tools of Finance

Chapter 27 covers the basic tools of finance. It teaches us about some of the tools people and firms use when choosing capital projects in which to invest. Specifically focusing on how people compare different sums of money at different points in time, how they manage risk, and how these concepts combine to help determine the value of a financial asset. The present value of any future value is the amount today that would be needed, at current interest rates, to produce that future sum. The future value is the amount of money in the future that an amount of money today will yield, given prevailing interest rates. Most people are risk averse, which means that they dislike bad things more than they like comparable good things. People can reduce risk by buying insurance, diversifying their risk, and accepting a lower return on their assets. According to the efficient markets hypothesis, asset prices reflect all publicly available information about the value of an asset. According to this theory, the stock market is informationally efficient, which means that prices in the stock market reflect all available information in a rational way.

Overall, I would give this chapter a difficulty rating of 1 out of 3 because it just builds off of what Chapter 26 said. Many things were simply reiterated or applied during this new chapter. Something I would like to go over is the controversy surrounding asset valuation and why stock prices may or may not be a rational estimate of a company’s true value. 

Article Review 6: Newsflash from the December ‘Jobs’ Report-The US Economy Is Dead in the Water

This week’s article is by David Stockman, titled “Newsflash from the December ‘Jobs’ Report-The US Economy Is Dead in the Water.” It explains how the Bureau of Labor Statistics is purposely giving out skewed information in order to make the economy seem like it’s in a better state than it really is. One way they are doing this is by overstating the number of jobs there are in the U.S. Their reason for the numbers they’ve made is seasonal adjustment. Basically the Bureau of Labor Statistics are making up their own numbers instead of using the actual statistics. Stockman predicts that all of these created lies will ultimately lead to a crash in the stock market.

From the very beginning of the article, I already recognize two terms that we’ve learned during class. We learned about the BLS and seasonal adjustments. BLS stands for the Bureau of Labor Statistics who calculates consumer price index. Seasonal adjustments are a statistical method to remove seasonal components in order to better analyze a trend. Thus, this article addressed things from the current and last chapter that we have learned. It included the tasks of the BLS as well as the stock market.

Journaling of Chapter 26: Saving, Investment, and the Financial System

Chapter 26, titled ‘Saving, Investment, and the Financial System’, focuses on the production of output in the long run. It specifically addresses the market for saving and investment in capital. Chapter 26 also shows how saving and investment are coordinated by the loanable-funds market. It teaches how to connect the lending of savers to the borrowing of investors. Financial institutions in the U.S economy include the bond market and the stock market. Financial intermediaries are financial institutions through which savers (lenders) can indirectly loan funds to borrowers. The two most important financial intermediaries are banks and mutual funds. The chapter also uses different national income identities to show the relationship between saving and investment. Long story short, saving is equal to investment. The last thing the chapter talks about is the market for loanable funds. The supply of loanable funds comes from national saving. The demand for loanable funds comes from households and firms.

Overall, I would give this chapter a difficulty rating of 1 out of 3. The ideas presented in this section were pretty easy to grasp because saving and investing is something seen in everyday life and is included in daily conversation so it seems more relatable than other concepts we have previously learned. Something I would like to further discuss in class is why consumption loans are not included in the supply of loanable funds. I would also like to delve more into the topic of financial intermediaries. For instance, what’s another example of a financial intermediary other than a bank?  

Journaling of Chapter 24: Measuring the Cost of Living

Chapter 24, Measuring the Cost of Living, details how economists measure the overall price level in the macroeconomy. It shows how to generate a price index and how to use a price index to compare dollar figures from different times. It also talks about how to adjust interest rates for inflation. There are also cons to using the consumer price index as a way to measure the cost of living. Both consumer price index and gross domestic product deflator is a measure of the overall price level. Consumer price index is a measure of the overall cost of the goods and services bought by a typical consumer. The cost of living is the amount by which incomes must rise in order to maintain a constant standard of living. In order to compare income from different years you must correct income for inflation. To do this, you use the formula: Value in year X dollars = Value in year Y dollars × (CPI in year X/CPI in year Y). It also discussed the differences between real interest rate, the nominal interest rate, and the inflation rate.

I would give this chapter a difficulty rating of 2 out of 3. This chapter was strongly related to the things mentioned in chapter 23 as both deal with how economists measure output and prices in the macroeconomy. However, I am still confused about indexation so it would be helpful if we went over that during class. 

Journaling of Chapter 23: Measuring a Nation's Income

Chapter 23, Measuring a Nation’s Income, marks the start of macroeconomics, the study of the entire economy as a whole. This section mostly deals with GDP, gross domestic product, a measure of the total income or total output into the economy. Thus, income equals expenditure. GDP is officially defined as the market value of all final goods and services produced within a country in a given period of time. The different components of GDP include consumption, investment, government purchases on goods and services by all levels of the government, and net exports. Readers also learn the difference between real GDP and nominal GDP. Nominal GDP is the value of output measured in the prices that existed during the year in which the output was produced. Real GDP is the value of output measured in the prices that were in a base year. GDP deflator is a measure of the price level. GDP deflator = (nominal GDP/real GDP) × 100. Real GDP is also a strong indicator of economic well-being of a society.

Overall, I would give this chapter a difficulty rating of 1 out of 3. Though the concepts are new, this chapter is relatively easy because they’re just trying to ease the readers into macroeconomics at this point. Since microeconomics and macroeconomics are closely linked, I believe that this transition between subjects will be smooth. However, I am excited to move on from microeconomics and start seeing the bigger picture. I’m sure that my knowledge on supply and demand will help me in future chapters as well. 

Journaling of Chapter 18: The Markets for the Factors of Production

     Chapter 18 is about the markets for the factors of production. Factors of production are the inputs used to produce goods and services. Inputs include labor, land, and capital. Starting off with labor, the wage of labor is determined by the supply and demand for it. So a firm will hire labor until marginal product equals the wage. The firm will also produce until price equals marginal cost. The value of marginal product curve is the labor demand curve. For supply of labor, readers should assume that the labor supply is upward sloping. This curve may shift due to change in tastes, change in alternative opportunities, and immigration. In competitive labor markets, the wage adjusts to balance the supply and demand for labor. The wage also equals the value of the marginal product of labor. Now the other factors of production are land and capital. Capital is the stock of equipment and structures used to produce goods and services. This chapter basically explained neoclassical theory of distribution which is about how labor, land, and capital are compensated for the roles they play in the production process.  

     I would give this chapter a difficulty rating of 2 out of 3. Though this chapter ties in a lot of concepts that we learned in the previous chapters, I have a hard time analyzing the charts and graphs so that’s something that would be helpful if reviewed in class. However, the given examples, such as the apple orchard, were helpful.  

Journaling of Chapter 17: Monopolistic Competition

Chapter 17 focused on monopolistic competition, a market structure in which many firms sell products that are similar but not identical. In order to be considered monopolistic competition, there must be many sellers, product differentiation, and free entry. Monopolistic competition shares some features of perfect competition and shares some features of monopolies. Like perfect competition, entry and exit will drive profits to zero economic profit in the long run. Like monopoly, monopolistic competition firms have a downward sloping demand curve. Monopolistically competitive firms produce an excess capacity because they produce below the efficient scale. They also charge prices that exceed their marginal cost for their products which is the markup over marginal cost. Monopolistic competition may be inefficient because it has a standard deadweight loss and because the number of firms is not ideal. The entry of new firms causes the product-variety externality and the business stealing externality. There is no easy way for public policy to solve these inefficiencies. Each firm has the incentive to advertise. Evidence suggests that advertising increases competition which reduces prices for consumers. Advertising correlates to the quality of the product. Brand names provide information and give firms an incentive to maintain their quality.

I would give this chapter a difficulty rating of 1 out of 3. The readers have already been introduced to perfect competition as well as monopoly so it was easier to grasp the concepts of monopolistically competition because it was basically different features that were picked from the two other extremes. 

Journaling of Chapter 16: Oligopoly

Chapter 16 discusses oligopoly. Readers have already been introduced to competition and monopoly. The market structure that lies between the two extremes, competition and monopoly, is known as imperfect competition. Imperfect competition includes industries that have competitors but not enough competition to be considered price takes. Imperfect competition can have two different types. The two different types are monopolistic competition and oligopoly. Oligopoly is a market structure in which only a few sellers offer similar or identical products. Due to this fact, oligopolistic firms are interdependent. In a competitive market, the decisions of one firms has no impact on other firms in the market because it’s so small in comparison to the entirety of the market that it’s negligible. However, in an oligopolistic firm, the decisions of one firm affect the other firms pricing and production decisions. A duopoly is an oligopoly that only contains two firms. Oligopolies should try to form a cartel, group of firms acting in unison, so that they can all behave as monopolists but the larger the oligopoly is, the more firms, the harder that becomes to achieve. Game theory is the study of how people behave in strategic situations. The readers are introduced to the prisoners’ dilemma. It illustrates why cooperation is difficult to maintain even if both sides are mutually beneficial. This relates to oligopoly because oligopolistic firms are better off cooperating with one another but they often don’t. Policymakers try to induce firms in an oligopoly market to compete rather than cooperate.  

I would give this chapter a difficulty rating of 2 out of 3. It’s easy to comprehend because we have already learned the two extremes and now we’re just looking at the concept that’s in between. However, this chapter introduced a lot of new concepts such as Nash equilibrium and the prisoners’ dilemma. Though confusing at times, overall, I was able to follow along.  

Article Review 5: Scott Adams' Secret of Success: Failure

     This article is very different from the past articles we have read but in a good way. I feel like I could apply a lot of the ideas that were brought up in the article in my everyday life. Scott Adams presented some tips to his readers on what not to do if you’re looking for success. The first tip is to know that no two situations are alike so be aware of successful people and their methods. The second and third tip is to forget about passion and forget about goals. Passion can merely stem from success. Success does not always arise from passion. Also, system-oriented people seem to be more successful than goal-oriented people because setting goals involves “the cycle of permanent presuccess failure.” (Adams). 

     Overall, Adam's purpose of writing this article is to tell his audience that they should see failure as a tool towards success and not as the final outcome. He then goes on to list out his own failures in the business world. I really liked how he was open about his road to success and didn’t try to hide his imperfections because it makes Adam seem more relatable. This allows the readers to have more hope in themselves because if one man fails and then succeeds, we can feel less ashamed of our own failures as well. Out of all the assigned article reviews, this has been my favorite article by far. It’s a nice change from the usual economic centered article because this one is more general and relatable. It definitely inspired me to look at my failures in a different light. It also helped me realize that though it may seem like I’m not succeeding when I fail, in some form, I am because it will be a part of what shapes my journey onto the way of success. That fact alone is really motivating.