Chapter 32 builds on from the topics in Chapter 21. The book talks about the two different central markets, the loanable funds market, and the market for foreign currency exchange. This chapter makes use of NCO that we learned about in the previous chapter, and using it to analyze equilibrium in an open economy. This chapter used more visuals than the last chapter, and I found it helpful. I would rate this chapter a difficulty level of 1.5/3
Mankiw focuses on the supply and demand in both markets I went over. The market for loanable funds tells us about the equilibrium interest rate, the amount that people want to save exactly balances the desired quantities of domestic investment and net capital outflows. National savings is the supply of loanable funds, and investment and NCO are the demand. For the market of foreign currency exchange, we see that supply is just the supply of dollars to be exchanged into foreign currency to assets abroad, and the demand is the demand for dollars to buy net exports.
The key determinant of net capital outflow is the real interest rate, as reiterated again by Mankiw. If interest rates go up, savings have to be falling or investment has to be increasing, so NCO has to fall. If interest rates go down, savings have to be increasing or investment has to be falling, so NCO has to be increasing. This means that there is a negative relationship between the domestic rate of interest and the NCO according to the book. When investors change their attitudes about holding assets of a country, the ramifications for the country's economy can be profound. In particular, political instability can lead to capital flight, which tends to increase interest rates and cause the currency to depreciate.
Tuesday, February 28, 2017
Wednesday, February 22, 2017
Chapter 31 Review
Chapter 31 focuses on open markets in the economy. I would give this chapter a 2/3 in difficulty in level. Overall, this chapter was a good read and fairly simply to grasp the understanding, although there were a few concepts that took a bit longer to comprehend, such as the theory of purchasing power parity.
Net exports are the value of domestic goods and services sold abroad minus the value of foreign goods and services sold domestically. Net capital outflow is the acquisition of foreign assets by domestic residents minus the acquisition of domestic assets by foreigners. Because every international transaction involves an exchange of an asset for a good or service, an economy's net capital outflow always equals its net exports. An economy's saving can be used either to finance investment at home or to buy assets abroad. Thus, national saving equals domestic investment plus net capital outflow.
The nominal exchange rate is the relative price of the currency of two countries, and the real exchange rate is the relative price of the goods and services of two countries. When the nominal exchange rate changes so that each dollar buys more foreign currency, the dollar is said to appreciate or strengthen. When the nominal exchange rate changes so that each dollar buys less foreign currency, the dollar is said to depreciate or weaken.
According to the theory of purchasing-power parity, a dollar should be able to buy the same quantity of goods in all countries. This theory implies that the nominal exchange rate between the currencies of two countries should reflect the price levels in those countries. As a result, countries with relatively high inflation should have depreciating currencies, and countries with relatively low inflation should have appreciating currencies.
Net exports are the value of domestic goods and services sold abroad minus the value of foreign goods and services sold domestically. Net capital outflow is the acquisition of foreign assets by domestic residents minus the acquisition of domestic assets by foreigners. Because every international transaction involves an exchange of an asset for a good or service, an economy's net capital outflow always equals its net exports. An economy's saving can be used either to finance investment at home or to buy assets abroad. Thus, national saving equals domestic investment plus net capital outflow.
The nominal exchange rate is the relative price of the currency of two countries, and the real exchange rate is the relative price of the goods and services of two countries. When the nominal exchange rate changes so that each dollar buys more foreign currency, the dollar is said to appreciate or strengthen. When the nominal exchange rate changes so that each dollar buys less foreign currency, the dollar is said to depreciate or weaken.
According to the theory of purchasing-power parity, a dollar should be able to buy the same quantity of goods in all countries. This theory implies that the nominal exchange rate between the currencies of two countries should reflect the price levels in those countries. As a result, countries with relatively high inflation should have depreciating currencies, and countries with relatively low inflation should have appreciating currencies.
Wednesday, February 15, 2017
Chapter 30 Review
Chapter 30 goes in depth about the causes and effects of inflation in an economy. This chapter was more difficult to understand than the other chapters. Some parts that I found it hard to understand were the shoeleather costs and the Fisher effect. I think that the velocity and quantity equation the book gave was a bit unusual, and the number of times that a single dollar switches ownership is hard to compute. I would give this chapter a 2/3.
The book uses supply and demand to discuss the equilibrium money supply set by the government. It alsouses a variety of examples, numbers, charts and vocabulary to teach about the effects and causes of inflation.
The book uses supply and demand to discuss the equilibrium money supply set by the government. It alsouses a variety of examples, numbers, charts and vocabulary to teach about the effects and causes of inflation.
Inflation was introduced as mostly caused by an increase of supply of money in the economy, with the argument that injecting money into the economy promotes economic activity. All economists agree that the costs become huge during hyper-inflation. But their size for moderate inflation, when prices rise by less than 10% per year, is more open to debate. When the central bank reduces the rate of money growth, prices rise less rapidly, as the quantity theory suggests. Yet as the economy makes the transition to this lower inflation rate, the change in monetary policy will have disruptive effects on production and employment,
Even though monetary policy is neutral in the long run, it has profound effects on real variables in the short run. Many people think that inflation makes them poorer because it raises the cost of what they buy. This view is a fallacy, however, because inflation also raises nominal incomes. The overall level of prices in an economy adjusts to bring money supply and money demand into balance. When the central bank increases, the supply of money, it causes the price level to rise. Persistent growth in the quantity of money supplied leads to continuing inflation. Overall, the chapter was quite difficult to understand, and is probably the hardest chapter so far.
Thursday, February 9, 2017
Chapter 29 Review
I would give this chapter a 2/3 in difficulty. The Fed's Organization was a bit hard to understand initially due to lots of content, and it took a while for me to understand the purpose and significance of the money multiplier. The chapter began with the loose definition of money and the monetary system in general, and that part was easier to understand.
In this chapter, Mankiw begins to talk about money and prices, in the long run, specifically focusing on the monetary system. Money is typically known to have a loose definition and can be seen as subjective and it is important to define what money actually is. Money is "the set of assets in an economy that people regularly use to buy goods and services from other people." There are tons of different functions of money. The first is the medium of exchange which is "an item that buyers give to sellers when they want to purchase goods and services." A unit of account is "the yardstick people use to post prices and record debts." A store of value is "an item that people can use to transfer purchasing power from the present to the future." Liquidity is "the ease with which an asset can be converted into the economy's medium of exchange." The book then moves on to the kinds of money.
First is commodity money which is "money that takes the form of a commodity with intrinsic value."
Second, there is fiat money which is defined as "money without intrinsic value that is used as money because of government decree." The Federal Reserve, the central bank of the United States, is responsible for regulating the U.S. monetary system. The Fed chairman is appointed by the president and confirmed by Congress every 4 years. The chairman is the lead member of the Federal Open Market Committee, which meets about every 6 weeks to consider changes in monetary policy. The Fed controls the money supply primarily through open-market operations: The purchase of government bonds increases the money supply, and the sale of government bonds decreases the money supply.
The Federal Reserve has in recent years set monetary policy by choosing a target for the federal fund's rate, a short-term interest rate at which banks make loans to one another. As the Fed achieves its target, it adjusts the money supply.
In this chapter, Mankiw begins to talk about money and prices, in the long run, specifically focusing on the monetary system. Money is typically known to have a loose definition and can be seen as subjective and it is important to define what money actually is. Money is "the set of assets in an economy that people regularly use to buy goods and services from other people." There are tons of different functions of money. The first is the medium of exchange which is "an item that buyers give to sellers when they want to purchase goods and services." A unit of account is "the yardstick people use to post prices and record debts." A store of value is "an item that people can use to transfer purchasing power from the present to the future." Liquidity is "the ease with which an asset can be converted into the economy's medium of exchange." The book then moves on to the kinds of money.
First is commodity money which is "money that takes the form of a commodity with intrinsic value."
Second, there is fiat money which is defined as "money without intrinsic value that is used as money because of government decree." The Federal Reserve, the central bank of the United States, is responsible for regulating the U.S. monetary system. The Fed chairman is appointed by the president and confirmed by Congress every 4 years. The chairman is the lead member of the Federal Open Market Committee, which meets about every 6 weeks to consider changes in monetary policy. The Fed controls the money supply primarily through open-market operations: The purchase of government bonds increases the money supply, and the sale of government bonds decreases the money supply.
The Federal Reserve has in recent years set monetary policy by choosing a target for the federal fund's rate, a short-term interest rate at which banks make loans to one another. As the Fed achieves its target, it adjusts the money supply.
Sunday, February 5, 2017
Chapter 28 Review
Chapter 28’s main focus was on unemployment and how to calculate the percentages of those working to the labor force and the labor force to the adult population. Overall, these concepts were relatively easy to understand through the way book describes the topics and the examples it provides. Rating would be a 1.5/3.
This chapter was longer than the others, but the book does a great job in making sure the information is clear and shows connections to real life effectively. the book also defines the two different kinds of unemployment, frictional and structural. Frictional unemployment is due to wanting to find a job that suits your tastes and it always changes via a change in taste otherwise known as sectoral shifts. Structural unemployment is a lack of wanted jobs in certain labor markets due to an increase in wages.
One reason for unemployment is the time it takes workers to search for jobs that best suit their tastes and skills. This frictional unemployment is increased as a result of unemployment insurance, a government policy designed to protect workers' incomes. A second reason our economy always has some unemployment is minimum-wage laws. By raising the wage of unskilled and inexperienced workers above the equilibrium level, minimum wage laws raise the quantity of labor supplied and reduce the quantity demanded. The surplus of labor represents unemployment.
A third reason for unemployment is the market power of unions. When unions push the wages in unionized industries above the equilibrium level, they create a surplus of labor.
This chapter was longer than the others, but the book does a great job in making sure the information is clear and shows connections to real life effectively. the book also defines the two different kinds of unemployment, frictional and structural. Frictional unemployment is due to wanting to find a job that suits your tastes and it always changes via a change in taste otherwise known as sectoral shifts. Structural unemployment is a lack of wanted jobs in certain labor markets due to an increase in wages.
One reason for unemployment is the time it takes workers to search for jobs that best suit their tastes and skills. This frictional unemployment is increased as a result of unemployment insurance, a government policy designed to protect workers' incomes. A second reason our economy always has some unemployment is minimum-wage laws. By raising the wage of unskilled and inexperienced workers above the equilibrium level, minimum wage laws raise the quantity of labor supplied and reduce the quantity demanded. The surplus of labor represents unemployment.
A third reason for unemployment is the market power of unions. When unions push the wages in unionized industries above the equilibrium level, they create a surplus of labor.
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