ECONOMICS EXTRA CREDIT HOMEWORK: 2014

Monday, June 16, 2014

HOMEWORK 4

Fourth Homework Andrena Athill

1. How can inflation change the distribution of income?

· An example of inflation affecting the distribution of income is the creditor/debtor relationship. To the extent that inflation is not anticipated, debtors will be paying back loans in inflated dollars compared to the money they borrowed. In effect, they will be paying back less than they borrowed, and creditors will be receiving back less than they loaned out. This helps to distribute income from creditors to debtors.

It is very possible that the same forces that cause inflation can also lead to an increase in income, but it would be those outside forces, not the inflation itself, which causes a change in the level of income. For example, an increase in aggregate demand can cause both an increase in real GDP and an increase in inflation.

2. Why don’t there seem to be costs to anticipated inflation?

· When people/businesses can make accurate predictions of inflation, they can take steps
to protect themselves from its effects.

e.g. Households may also be able to switch savings into deposit accounts offering a
higher nominal rate of interest or into other financial assets such as housing or equities
where capital gains over a period of time might outstrip general price inflation.

e.g. Companies can adjust prices and lenders can adjust interest rates.

3. Why do some individuals or firms experience a cost despite perfectly anticipated inflation?

Individuals or firms can experience a cost despite perfectly anticipated inflation because of internal factors that affect growth.

4. Why do people dislike unanticipated inflation?

· People dislike unanticipated inflation because they are not prepared for it and sometimes cannot handle the outcomes and effects that it has on the economy also because when inflation is volatile from year to year, it becomes difficult for individuals and businesses to correctly predict the rate of inflation in the near future.

1. Why does a new worker entering the labor force or a worker who has lost a job probably will not find an acceptable job right away?

2. What are the categories of unemployment and their defining characteristics?

· Structural Unemployment, one of the three types of unemployment, is associated with the mismatch of jobs and workers due to the lack of skills or simply the wrong area desired for work. Structural unemployment depends on the social needs of the economy and dynamic changes in the economy. For instance,advances in technology and changes in market conditions often turn many skills obsolete; this typically increases the unemployment rate. For example, laborers who worked on cotton fields found their jobs obsolete with Eli Whitney's patenting of the cotton gin. Similarly, with the rise of computers, many jobs in manual book keeping have been replaced by highly efficient software. Workers who find themselves in this situation find that they need to acquire new skills in order to obtain a new job.

· Frictional Unemployment is always present in the economy, resulting from temporary transitions made by workers and employers or from workers and employers having inconsistent or incomplete information. This type of unemployment is closely related to structural unemployment due to its dependence on the dynamics of the economy. It is caused because unemployed workers may not always take the first job offer they receive because of the wages and necessary skills. This type of unemployment is also caused by failing firms, poor job performance, or obsolete skills. This may also be caused by workers who will quit their jobs in order to move to different parts of the country.

· Unemployment that is attributed to economic contraction is called cyclical unemployment. The economy has the capacity to create jobs which increases economic growth. Therefore, an expanding economy typically has lower levels of unemployment. On the other hand, according to cyclical unemployment an economy that is in a recession faces higher levels of unemployment. When this happens there are more unemployed workers than job openings due to the breakdown of the economy. This type of unemployment is heavily concentrated on the activity in the economy. To understand this better take a look at our Business Cycles section.

· Frictional unemployment can be seen as a transaction cost of trying to find a new job; it is the result of imperfect information on available jobs. For instance, a case of frictional unemployment would be a college student quitting their fast-food restaurant job to get ready to find a job in their field after graduation. Unlike structural unemployment this process would not be long due to skills the college graduate has to offer a potential firm.

3. What do people whose skill become obsolete and therefore unemployed do to become employed again? Give an example.

4. Why do firms lay off workers during a recession and rehire during the following expansion?

· Firms lay off workers during recessions because they cannot sustain wages and make a profit simultaneously during recession however, during a recession they rehire because their sales increase and they can afford to pay more wages.

5. What does the natural rate of unemployment consist of?

· It represents the hypothetical unemployment rate consistent with aggregate production being at the "long-run" level. This level is consistent with aggregate production in the absence of various temporary frictions such as incomplete price adjustment in labor and goods markets. The natural rate of unemployment therefore corresponds to the unemployment rate prevailing under a classical view of determination of activity. It is mainly determined by the economy's supply side, and hence production possibilities and economic institutions. If these institutional features involve permanent mismatches in the labor market or real wage rigidities, the natural rate of unemployment may feature involuntary unemployment. The natural rate of unemployment is a combination of frictional and structural unemployment that persists in an efficient, expanding economy when labor and resource markets are in equilibrium.

HOMEWORK 9

1 Analyze the role of investment in human capital formation.

2. Analyze the role of investment in physical capital formation.

3. Demonstrate the role of investment in research and development, and technological progress.

4. Illustrate how public policies influence the long-run economic growth of economy

We study the accumulation of human capital and the behavior of consumption and earnings in a life cycle equilibrium model with endogenous borrowing constraints. Constraints arise endogenously from the inalienability of human capital and the limited punishments that creditors are able to impose on those who default. The endogeneity of borrowing constraints produces a number of interesting relationships. First, efficient borrowing limits are functions of individual observable characteristics and choices, especially ability and human capital investments

A term used to describe net capital accumulation during an accounting period. Capital formation refers to net additions of capital stock such as equipment, buildings and other intermediate goods. A nation uses capital stock in combination with labour to provide services and produce goods; an increase in this capital stock is known as capital formation.

The research and development (R&D, also called research and technical development or research and technological development, RTD in Europe) is a specific group of activities within a business. The activities that are classified as R&D differ from company to company, but there are two primary models. In one model, the primary function of an R&D group is to develop new products; in the other model, the primary function of an R&D group is to discover and create new knowledge about scientific and technological topics for the purpose of uncovering and enabling development of valuable new products, processes, and services. Under both models, R&D differs from the vast majority of a company's activities which are intended to yield nearly immediate profit or immediate improvements in operations and involve little uncertainty as to the return on investment (ROI). The first model of R&D is generally staffed by engineers while the second model may be staffed with industrial scientists. R&D activities are carried out by corporate (businesses) or governmental entities.

Since economic growth is measured as the annual percent change of gross domestic product (GDP), it has all the advantages and drawbacks of that measure. For example, GDP only measures the market economy, which tends to overstate growth during the change over from a farming economy with household production.[3] An adjustment was made for food grown on and consumed on farms, but no correction was made for other household production. Also, there is no allowance in GDP calculations for depletion of natural resources.

What public policies are the most influential in society?

What is the investment in human capital like?

How can investment be used to progress more technological processes?

What is physical capital formation not like?

Research and development is of great importance in business as the level of competition, production processes and methods are rapidly increasing. It is of special importance in the field of marketing where companies keep an eagle eye on competitors and customers in order to keep pace with modern trends and analyze the needs, demands and desires of their customers.

Capital formation is a concept used in macroeconomics, national accounts and financial economics. Occasionally it is also used in corporate accounts. It can be defined in three ways:

It is a specific statistical concept used in national accounts statistics, econometrics and macroeconomics. In that sense, it refers to a measure of the net additions to the (physical) capital stock of a country (or an economic sector) in an accounting interval, or, a measure of the amount by which the total physical capital stock increased during an accounting period. To arrive at this measure, standard valuation principles are used.

It is used also in economic theory, as a modern general term for capital accumulation, referring to the total "stock of capital" that has been formed, or to the growth of this total capital stock.

Economic growth is the increase in the market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. Of more importance is the growth of the ratio of GDP to population (GDP per capita), which is also called per capita income. An increase in per capita income is referred to as intensive growth. GDP growth caused only by increases in population or territory is called extensive growth.

HOMEWORK 8

1. Analyze fiscal and monetary policies from the demand-side effects.

2. Analyze fiscal and monetary policies from the supply-side effects.

3. Evaluate the impact of government deficits and debt.

4. Differentiate between demand-pull and cost-push inflation.

· There are two powerful tools our government and the Federal Reserve use to steer our economy in the right direction: fiscal and monetary policy. When used correctly, they can have similar results in both stimulating our economy and slowing it down when it heats up. The ongoing debate is which one is more effective in the long and short run.

· Fiscal policy is when our government uses its spending and taxing powers to have an impact on the economy. The combination and interaction of government expenditures and revenue collection is a delicate balance that requires good timing and a little bit of luck to get it right. The direct and indirect effects of fiscal policy can influence personal spending,capital expenditure, exchange rates, deficit levels and even interest rates, which are usually associated with monetary policy.

· Each year, the deficit is added to the debt. The Treasury must sell Treasury bonds to raise the money to cover the deficit. This is known as the public debt, since these bonds are sold to the public.

· In addition to the public debt, there is the money that the government loans to itself each year. This money is in the form of Government Account Securities, and it comes primarily from the Social Security Trust Fund. These loans are not counted as part of the deficit, since they are all within the government. However, as the Baby Boomers retire, they will begin to draw down more Social Security funds than are replaced with payroll taxes. These benefits will need to be paid out of the general fund. This means that either other programs must be cut, taxes must be raised or benefits must be lowered. Unfortunately, legislators have not yet agreed on an effective plan to meet Social Security obligations.

· The difference between these two types of inflation is found in their causes. Both have the same effects (increasing price level), but they are caused by different things.

· Demand-pull inflation is caused by excess demand. When the people as a whole get more money they are able to pay more for goods and services (unless more goods and services are produced). Economists talk about more money “chasing” the same amount of goods and services. This causes shortages and prices rise.

· Cost-push inflation is caused by disruptions in supply. These disruptions cause increases in the price of production. That leads to inflation. For example, a rise in the price of oil causes practically all production to become more expensive.

· How do the demand side effects affect the economy?

· How is demand pull satisfied?

· What is the supply side effects like?

· What can cost push inflation be compared to?

· What are governments deficits not like?

· Inflation is the persistent rise in general price level. Demand pull inflation is one where there is an increase in price level due to the increase in the aggregate demand.

· On the other hand the cost push inflation is one where price level increases due to the increase in the price of inputs like increase in wages and raw materials. the increase in price of inputs decreases the short run aggregate supply which increases the price level. Thus if there is a shift in the supply curve backwards we say that inflation is cost push and when there is a rightward shift in the demand curve we say that its demand pull inflation.

· Initially, deficit spending and the resultant debt boosts economic growth. This is especially true in a recession. That's because deficit spending pumps liquidity into the economy. Whether the money goes to jet fighters, bridges or education, it ramps up production and creates jobs.

· However, not every dollar creates the same number of jobs. In fact, military spending creates 8,555 jobs for every billion dollars spent. This is less than half the jobs created by that same billion spent on construction. For more, see Unemployment Solutions.

· Supply-side economics, also known as trickle-down economics, is an economic theory that states that a reduction in taxes will stimulate the economy through increased consumer spending. Over time, the boost to economic growth will generate a larger tax base, which will make up for the revenue lost from the tax cut.

· When interest rates are cut (which is our expansionary monetary policy), aggregate demand (AD) shifts up due to the rise in investment and consumption. The shift up of AD causes us to move along the aggregate supply (AS) curve, causing a rise in both real GDP and the price level. We need to determine the effects of this rise in AD, the price level, and real GDP (output) in each of our two countries.

HOMEWORK 7

Explain how money is created. Compare the tools of the Federal Reserve System

· In economics, money creation is the process by which the money supply of a country or a monetary region (such as theEurozone) is increased. A central bank may introduce new money into the economy (termed 'expansionary monetary policy') by purchasing financial assets or lending money to financial institutions. Commercial bank lending also creates money under the form of demand deposits). When banks had sizable reserve requirements (freezing an important percentage of their deposits in mandatory reserves at the central bank) it was said that the process multiplied this base money through fractional reserve banking.

· Central banks monitor the amount of money in the economy by measuring monetary aggregates such as M2. The effect of monetary policy on the money supply is indicated by comparing these measurements on various dates

· The Fed funds rate is perhaps the most well-known Federal Reserve tool. However, it has many more at its disposal, and they all work together. Here's an introduction to them all, with links if you want to read more. the has several other tools which allow it to set monetary policy.

· If a bank doesn't have enough on hand to meet the reserve requirement, it will borrow from other banks. The Federal funds rate is the interest banks charge each other for these overnight loans. The amount lent and borrowed is known as the Fed funds. The Federal Open Market Committee (FOMC) targets a specific level for the Fed funds rate at its regularly scheduled meetings.

· How exactly does the Fed go about accomplishing its goals?

· What tools does the Fed have at its disposal to affect monetary policy?

· How are bank deposits are created

· The Federal Reserve is responsible for setting the reserve requirements for banks. Reserve requirements specify what percentage of a bank’s deposits the bank has to keep on reserve with the Fed. For instance, if the Fed sets the reserve requirement at 10 percent and a bank has $10 billion in deposits, the bank is required to keep $1 billion on reserve at the Fed

· The process in which banks increase the amount of funds in checkable deposits (and thus the M1 money supply) by using reserves to make loans. Money creation is made possible through fractional-reserve banking. Because banks keep only a fraction of deposits as reserves, extra reserves can be used to back up and create additional checkable deposits (money) that did not previously exist. Government policy makers (the Federal Reserve System) rely on the money creation process when conducting monetary policy. Money creation by banks is a modern alternative to printing paper currency

Compare and Contrast economic theories: Keynesian, Monetarism, Rational expectations, and Supply Side Economics

· An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression. Keynes advocated increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the Depression. Subsequently, the term “Keynesian economics” was used to refer to the concept that optimal economic performance could be achieved – and economic slumps prevented – by influencing aggregate demand through activist stabilization and economic intervention policies by the government. Keynesian economics is considered to be a “demand-side” theory that focuses on changes in the economy over the short run.

· Monetarism is a school of economic thought that emphasizes the role of governments in controlling the amount of money in circulation. It is the view within monetary economics that variation in the money supply has major influences on national output in the short run and the price level over longer periods and that objectives of monetary policy are best met by targeting the growth rate of the money supply.

· An economic idea that the people in the economy make choices based on their rational outlook, available information and past experiences. The theory suggests that the current expectations in the economy are equivalent to what the future state of the economy will be. This contrasts the idea that government policy influences the decisions of people in the economy.

· Supply side economics is the economic theory that believes that if taxes are reduced for businesses and the wealthy that the benefits of this will affect everyone. This is also known as trickle down economics.

· How is each theory applied and used in modern economics?

· How does the trickle down policy effect the economy?

· What is each theory like?

· What can they be compared to?

· How can we regulate market economy?

· Supply-side economics is better known to some as "Reaganomics," or the "trickle-down" policy espoused by 40th U.S. President Ronald Reagan. He popularized the controversial idea that greater tax cuts for investors and entrepreneurs provide incentives to save and invest, and produce economic benefits that trickle down into the overall economy. In this article, we summarize the basic theory behind supply-side economics.

· In The General Theory ofEmployment, Interest and Money (1936) he argued that unemployment was characteristic of anunregulated market economy and therefore to achieve a high level of employment it was necessary forgovernments to manipulate the overall level of demand through monetary and fiscal policies (including,when appropriate, deficit financing). He helped to found the International Monetary Fund and the WorldBank

The historical perspective of inflation and unemployment in relation to Phillips curve and stagflation.

· In economics, the Phillips curve is a historical inverse relationship between rates of unemployment and corresponding rates of inflation that result in an economy. Stated simply, decreased unemployment, (i.e., increased levels of employment) in an economy will correlate with higher rates of inflation.

· While there is a short run tradeoff between unemployment and inflation, it has not been observed in the long run.^[1] Accordingly, the Phillips curve is now seen as too simplistic, with the unemployment rate supplanted by more accurate predictors of inflation based on velocity of money supply measures such as the MZM ("money zero maturity") velocity,^[2] which is affected by unemployment in the short but not the long term.^[3]

· William Phillips, a New Zealand born economist, wrote a paper in 1958 titled The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957, which was published in the quarterly journal Economica. In the paper Phillips describes how he observed an inverse relationship between money wage changes and unemployment in the British economy over the period examined. Similar patterns were found in other countries and in 1960 Paul Samuelson and Robert Solow took Phillips' work and made explicit the link between inflation and unemployment: when inflation was high, unemployment was low, and vice-versa

· What are the dynamics of the Phillips curve?

· What can it be compared to?

· How can the wages and unemployment be further explained?

· How does unemployment effect microeconomics?

· The Phillips curve originated out of analysis comparing money wage growth with unemployment. The findings of A.W. Phillips in The Relationship between Unemployment and the Rate of Change of Money Wages in the United Kingdom 1861–1957 suggested there was an inverse correlation between the rate of change in money wages and unemployment. For example a rise in unemployment was associated with declining wage growth and vice versa.

· The Phillips curve suggests there is an inverse relationship between inflation and unemployment.

· Phillips' discovery appears to be intuitive. When unemployment is high, many people are seeking jobs, so employers have no need to offer high wages. It's another way of saying that high levels of unemployment result in low levels of wage inflation. Likewise, the reverse would also seem to be intuitive. When unemployment rates are low, there are fewer people seeking jobs. Employers looking to hire need to raise wages in order to attract employees. (For more insight, read Macroeconomic Analysis.)