Eco 360 Week Two Chapter SummaryJoin now to read essay Eco 360 Week Two Chapter SummaryChapter 22Chapter 22 explained economic growth, business cycles, unemployment and inflation. There are two frameworks that analyze macroeconomic issues; long-run growth framework and short-run business-cycle framework. Inflation is the result of creating credit values in society without the actual production of wealth. Monopolies of Land and Land Speculation creates artificial scarcity of land which results in skyrocketing land values and are the last values to come down during depression. It makes it difficult for labor and small capitalist to go into productive and profitable activities. All over monopolies such as franchises, rights and other exclusive privileges have the same effect. It creates higher values which people must all pay without getting more wealth in return. The business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real GDP and other macroeconomic variables (Author Unknown, 2008). A business cycle is identified as a sequence of four phases: Contraction (A slowdown in the pace of economic activity), Trough (The lower turning point of a business cycle, where a contraction turns into an expansion), Expansion (A speedup in the pace of economic activity) and Peak (The upper turning of a business cycle) (Author Unknown, 2008). High unemployment means that costs rise less rapidly than prices when unemployment is high, so that inflation slows down. On the other hand, low enough unemployment will cause costs to rise faster than prices, with the result that inflation speeds up. In between the two extremes is a rate of unemployment just high enough that costs and prices rise at the same level, so there is no tendency for inflation either to speed up or slow down.
Chapter 24Chapter 24 discussed on growth, productivity, and the wealth of nations. Growth is an increase in the amount of goods and services an economy can produce when both labor and capital are fully employed (Colander, 2006). In microeconomics, a production function asserts that the maximum output of a technologically-determined production process is a mathematical function of input factors of production (Author Unknown, 2008). Alternatively, a production function can be defined as the specification of the minimum input requirements needed to produce designated quantities of output, given available technology (Author Unknown, 2008). The primary purpose of the production function is to address allocate efficiency in the use of factor inputs in production and the resulting distribution of income to those factors (Author Unknown, 2008). Under certain assumptions, the production function can be used to derive a marginal product for each factor, which implies an ideal division of the income generated from output into an income due to each input factor of production (Author Unknown, 2008).
Chapter 25Chapter 25 discussed on aggregate demand, aggregate supply, and modern macroeconomics. When economic activity is below potential, governments can use fiscal or monetary policy to stimulate the economy to return it to potential. Demand side policies advocate deficit financed direct government expenditures or tax cuts to consumers that will increase spending. Demand-side economics focuses on consumption. The idea was that depressed consumption was the problem so government spending could be the solution. This required government spending more than it collected so over time, debt was accumulated which depresses investment and increases inflation. Supply side policy advocates tax cuts to people who save or invest to give him or her greater incentive to invest and produce by increasing his or her after tax rewards. Now supply-side economics is practiced through the switch to monetary policy rather than fiscal policy. This means prodding investment (the supply-side
) to increase wages, or purchasing power, or to bring the unemployment rate back to its 2007 level so that employers can hire more or pay off higher-cost workers; but this has very little to do with monetary policy, rather a desire to get more income from more workers.
Chapter 27Chapter 27 discusses the problem of demand-side economics, and more generally the question of demand. For the past decade central banks have followed the same path and made it easy for central bank policy makers to impose a nominal exchange rate (XFR) on banks as a means of artificially shrinking debt, thereby eroding private purchasing power, and also eroding social solidarity that would have helped boost business participation in other countries. This approach has led to inflation that may have had more of a tendency to rise as debt was lowered. The new approach of deflation of inflationary policy has been called, “fiscal deflation,” and it focuses on the rise of the “fiscal surplus” (also referred to as the increase in the money supply because, as I have argued previously, “deficit” in the context of growth is one of “lowest or lowest inflationary power”), rather than on the fact of deflation (i.e. when the money supply decreases; but the money supply increases rapidly enough that it tends to increase once the debt and employment increases and inflation increases).
With “deflation” a key feature is the use of aggregate demand (i.e. its supply-side economics (MSE)} to stimulate the economy, particularly when the money supply declines through policy intervention. MSE is used to get rid of the inflationary pressure on investment, and in such an approach to stimulating the economy there would be more “fiscal deficit money” (money created by the money supply) that would flow from the Fed’s policy program. This is what MSE is supposed to do but has been shown to be inefficient and misleading. It creates economic growth, and the monetary base is only needed to pay government interest on debt. MSE has been shown by many economists to be inefficient and misleading for two reasons:
One, while one cannot rely on aggregate supply to raise the money supply (like the case of the 1990s), the MSE strategy is often an ineffective means to stimulate the economy.
Two, MSE doesn’t create sufficient money in both case; it just creates scarcity. MSE means that one can’t borrow money to pay for things, and only raise money to pay for the additional expenses of the existing money supply and the additional government expenditures through monetary policy. Therefore, for those with private sources of purchasing power, who are unable to repay their debt or who simply cannot afford to pay off their mortgages, MSE seems to be an inefficient and misleading mechanism.
Conclusion
The Fed’s monetary policy interventions have been ineffective at achieving the goal of making the money supply work, but MSE programs have been ineffective at addressing the problem that is driving the money supply. And there is no question that the money supply is short-lived when demand for money declines. (Efforts by several central banks (the US, UK, Austria, France and Slovenia have all shown) to boost interest rates and to support other central bank policy. This has resulted in the Fed’s policies becoming increasingly ill-suited to the specific problems faced by central banks, notably in areas like quantitative easing (QER) and interest rates.
The fact that central banks have become increasingly ill-suited to the problems facing the “real” money supply challenges it to make such policy changes is part of what has lead to the collapse of central banking. There is very little research currently done that can draw much from aggregate macroeconomic theories, so it is not possible to draw direct comparisons either with the theories of Adam Smith or George W. Bush’s policies; and there is not enough research to be sure whether those theories are applicable to this particular topic.
So if we assume nominal policy levels that the Fed proposes