Chapter 27 Review

Finances were the main focus of Chapter 27. Mankiw’s teaching of the present/future value of money was pretty easy to understand mathematically. Conceptually with the risk aversion and insurance market (with its risk adverse selection) was explained well and left little room for confusion. Overall, this chapter was simple in its ideas and wasn’t hard to read. I would give this a difficulty level of 1.5/3.  In order to calculate the present value and future values, you need to have the interest and we assume that the interest rate will not change as much as it has recently. 

I think this chapter will have more real life applications as we are into Macro, this chapter teaches us how to diversify our risk and spread it out instead of dumping it all on one item. There is no way to get rid of risk completely, but there is a way to minimize it. The present value states that a dollar in the future is less valuable than a dollar today, and it gives a way to compare sums of money at different points in time. This is because due to savings earn interest, a sum of money in present day is more valuable than the same sum of money in the future. The present value of any future sum is the amount that would be needed today, given prevailing interest rates, to produce that future sum. 

The book says that due to diminishing marginal utility, most people are risk averse. Risk-averse people can reduce risk by buying insurance, diversifying their holdings, and choosing a portfolio with lower risk and lower return. The value of an asset equals the present value of the cash flows the owner will receive. According to the efficient markets hypothesis, financial markets process available information rationally, so a stock price always equals the best estimate of the value of the underlying business. 

Chapter 26 Review

I thought this chapter was relatively hard compared to the previous chapter because there were many vocabulary terms to understand, and the concepts of this chapter are new to me, so it took a longer time for me to grasp the subject. (Stocks/stockholders and private/public saving) I would rate this chapter a 2/3.

Chapter 26 starts off describing how the Unites States financial system is made up of many types of financial institutions, such as the bond market, the stock market, banks, and mutual funds. All these institutions act to direct the resources of households that want to save some of their income into the hands of households and firms that want to borrow.  

The book, later on, talks about national income accounting identities, which reveals some important relationships among macroeconomic variables. In particular, for a closed economy, national saving must equal investment. In a bond, the company will borrow money from the public in the promise of eventually paying the initial amount back, along with some interest. Of course, there are dangerous of defaulting on a bond, which can be made up for by offering higher interest rates to incentivize lenders. Stocks are introduced by Mankiw as a share of the company. If the company profits, so do the stockholders, but if the company loses, the bondholders get paid first before the stockholders get anything.

The book then moves to financial intermediaries, and the two examples used to explain are banks and mutual funds. Banks are explained by Mankiw as a place where people put their money in, and the bank will pay them interest on their money in exchange for lending out their money to borrowers for a slightly higher interest rate. This allows for a small profit for the bankers. Mutual funds seem to be less risky than either option since it’s not focusing all “your eggs in one basket” as Mankiw states. That was the first half of the chapter, and the second half seemed to just explain government surplus/deficit as well as private/public saving.

Chapter 24 Review

Overall I would give this chapter a difficulty rating of 1.5/3. The general idea of the chapter revolves around the CPI, and the CPI, although initially difficult to understand, became easier. The book does a good job of explaining by using the basket example. Also, although there were a few equations (inflation rate and dollar figures from different times) to memorize, it didn't seem to hard to understand, only hard to keep into memory. 

Chapter 24 began by introducing the topic of CPI, also known as consumer price index. It measures the overall cost of the goods and services bought by a typical consumer. The book also discusses the concepts of inflation based on real and nominal interest rates. The book had a very nice way of explaining this, especially with the basket example. 

CPI also fails to account for the introduction of new goods in the market, making the so called basket unreliable as consumers may be interested in purchasing new goods. There are a lot of arguments that CPI overestimates the cost of living, and many are against it, espciailly those of which incomes are based according to CPI. Due to these reasons, the CPI overstates true inflation. Similar to the CPI, the GDP deflator measures the overall level of prices in the economy. 

The nominal interest rate and the real interest rates were re-introduced in this chapter, and they were easy to understand because we learned it last chapter and this concept seemed more familiar. 

Chapter 23 Review

I would give this chapter a 1.5/3 in difficulty. This chapter is basically setting the foundation of Macroeconomics by explaining the concepts of GDP (Gross Domestic Product). The concepts are mostly common sense, and only some parts of this chapter (GDP Deflator) were a bit confusing, but that no longer was a problem once I read it over multiple times.

The book first introduces GDP and its definition: the market value of all final goods and services produced within a country in a given period of time. I would say that the book does a good job of explaining the definition because it elaborates on each part of the definition, separating it into their own categories. "Of all", "Final," "Goods and Services", etc.

Then the book goes on to give us an equation, Y= C +I +G+NX. This equation basically defines the components of GDP. Consumption, Investments (as mentioned in the book, doesn't mean financial investments, it actually means purchases of investment goods), government purchases, and net exports.

An interesting part of the GDP is that there are two types. Nominal, and real. The only part at which they differ is choosing a constant price or a current price. In addition, the book introduces the idea of GDP Deflator. I had a little bit of trouble trying to understand how to use it, but the table the book provided helped me comprehend this new concept.