Heather's Homework

I was glad to learn more about how interest rates affect the overall economy, as well as the cues that coincide with decisions to manipulate the interest rate. I ’m most interested in the arguments regarding government funded projects as well as a balanced government budget. On the one hand, I can see how money can trickle down from the government to the people when public projects are implemented. Construction jobs are sustained when bridges need to be built. However, it should be noted that this does not necessarily affect the job security within the industry itself. It’s great if businesses can win contracts, but what actually happens when the project is finished? How much has it actually changed the community itself, or has it just lined the pockets of a few? Also, how does the government decide which projects are most necessary? And in order to fund it, aren’t they raising taxes overall? It seems that when governments attempt to somehow increase public welfare by increasi...

Inflation and unemployment have an inverse relationship. You can ’t have both become lower at the same time, but policymakers can decide acceptable threshold levels which will then inform which is more of a priority to pursue. It is good that people work at jobs, because then the GDP rises, which improves the nation’s economy as they become more efficient. But you see, a s more people get jobs, their income rises, and then their consumption also increases. Increased consumption means that prices generally rise as the goods go to the highest bidder. Workers in turn will demand higher wages in order to keep up with these rising prices, or inflation. So in the end, as unemployment decreases inflation will increase. I ’m not so sure that there really is a trade-off, as it seems to be more of a feedback cycle rather than something that can be legislated. And this feedback cycle seems to have a historic pattern as well. But overall, neither factor alone totally conveys the quality o...

Consumer confidence describes the way people feel about the future. Their beliefs manifest into actions. Pessimism reduces the demand for goods and services because people would prefer to save for an emergency. This reduction in spending causes firms to lose sales, and then cut hours or jobs of their employees. This breeds more pessimism and the cycle continues, possibly triggering a recession. The government tries to enact stimulating policies to stabilize the economy. Optimism increases the demand for goods and services because people want to enjoy their discretionary income. When people spend freely, the money supply increases and inflation becomes a possibility. The government tries to enact contractionary policies to stabilize the economy.

This chapter talks about how the government's fiscal policy influences aggregate supply and aggregate demand regarding the money supply. The Fed sets the interest rate, and when they make a change it impacts the opportunity cost people face when deciding whether to spend or save money. This in turn affects how much money is supplied and demanded within the economy. The government can make choices about the purchases it makes or taxes it imposes, and this in turn affects many people's paychecks. Overall, it influences people's consumer spending. Pessimism and optimism can cause people to change their demand for money, and on a large scale certain repeated actions can trigger a recession or inflation. Both the Fed and the government use their policies to attempt to stabilize these fluctuations.

Question 1: How does a country's national savings impact net capital outflow? Poor response:   If people save money, they can buy more things. Thoughtful response:  The national savings is the supply of loanable funds. So more savings means that more loans can be made. These loans are used to purchase capital assets either at home or abroad. So a country that has savings is able to more fully participate in the marketplace, and some of that money will likely be a part of net capital outflow. Question 2: How are net capital outflow and net exports related to foreign exchange? Poor response:  In both cases, things are leaving the country. Thoughtful response:  Net capital outflow represents the amount of currency supplied to the foreign markets. Net exports represents the amount of currency demanded by foreign markets for the purpose of trading with another nation. The dollars that leave the country through net capital outflow are the...

Seeing how the flow of goods and services is related to the flow of capital in international markets is interesting. Selling a good to a foreign party increases your exports, and when you buy foreign products with the foreign currency you have received you are increasing imports. The question of whether domestic citizens or foreign people are investing more heavily will determine whether there is a trade surplus or deficit. But this is a multi-faceted label, and more factors must be observed in order to determine how it affects a nation's well-being. I'm curious to know more about the economic changes that occurred when the EU countries initially adopted the Euro. How did the differing exchange rates determine how many Euros each country would be given? How did that affect their ability to grow?