Chapter 21 is titled “the influence of monetary and fiscal policy on aggregate demand.” It begins by explaining how monetary policy influences aggregate demand by focusing on the theory of liquidity preference, the downward slope of the aggregate-demand curve, changes in the money supply, the role of interest-rate targets in Fed policy. It continues to describe how fiscal policy, “the setting of the level of government spending and taxation by government policymakers”, influences aggregate demand, with focuses on changes in government purchases, the multiplier effect, and the crowding-out effect. Finally, it discusses how policy can be used to stabilize the economy, and explores the benefits and negatives of this choice, as well as what automatic stabilizers are.

Consumer confidence interacts with public policies when in a recession because when households are pessimistic they reduce consumption spending which leads to reduced aggregate demand, lower production, and higher unemployment. However, in boom, when households are confident this leads to the opposite effect. Keynes argued that this is to the benefit of the government because they can change policies to correspond with these beliefs. However, this is also something that the Fed and policy makers cannot control and it can have huge influences on the economy that they did not anticipate and did not cause, which can cause a lag between the change and when a policy is actually enforced. This can make policies more effective in achieving economic stability if the beliefs correspond with the policy or if the policy makers can implement it quickly enough, however, it will be less effective if there is a lag because the economy could change by the time it makes a difference and the economy should be left to stabilize itself.

Chapter 20 is titled “aggregate demand and aggregate supply” and begins with the three key facts about economic fluctuations: 1. economic fluctuations are irregular and unpredictable, 2. most macroeconomic quantities fluctuate together, and 3. as output falls, unemployment rises. It continues by explaining short-run economic fluctuations, the aggregate-demand curve, why it slopes downward and why it might shift, the aggregate-supply curve, why it is vertical in the long-run, slopes upward in the short-run, and why it might shift, as well as how to use both to depict long-run growth and inflation. Finally it summarizes two causes of economic fluctuations which are the effects of a shift in aggregate demand and the effects of a shift in aggregate supply.

After this reading this chapter I believe that the current US economy, especially Colorado, is doing well because the inflation rate is very low as a result of many households converting their money into interest-bearing assets. This increases the quantity of goods and services demanded. The unemployment rate is also low, which means that outputs are high. I do believe that a recession will come soon, although fluctuations are irregular and unpredictable, if there continues to be more changes in public policy, especially concerning taxes which can cause shifts in the aggregate-demand curve. This causes people to be pessimistic of the government and to lower their expectations, which would lead to falling incomes and rising unemployment. This is why the government should appear strong and united, especially during times of change, because otherwise citizens will begin to question them. I don’t believe that the country is in danger of overheating because I believe there are options that the government and the Fed would institute before anything would seriously go wrong. Also in the long-run the shifts in aggregate demand will correct itself and although the price level would change, the level of output would not.

Chapter 14 is titled “the basic tools of finance.” It introduces how to measure the time value of money. It continues by discussing how to manage risk by explaining risk aversion, the markets for insurance, diversification of firm-specific risk, and the trade-off between risk and return. Finally, it discusses asset valuation by fundamental analysis, the efficient markets hypothesis, and market irrationality.

I have definitely considered the trade-off between risk and return when making an investment, because most rational people compare the risks and returns of every decision they make. While I haven’t made any large investments for my self, I make day to day choices in the trade-off between risk and return every time that I purchase something because it could have gone into my bank account and gained interest. My family and I also made the decision to have me go to college, requiring us all to take the risk of spending so much money on tuition and hoping for a higher return in the future, rather than having me work a full time job and making an income. This risk did not change my investment because we decided that education is more important and will pay off in the long-run more than a temporary income would. I do expect a risk premium related to the level of risk because people with a higher education are more qualified for more advanced and specialized jobs so that they are paid more. I would hope to make back what I have made in tuition for the investment to have been worth it.

The present value of a dollar is more than its future value because the dollar today can be invested and earn interest so that it will be worth more tomorrow. This is irregardless of inflation or deflation in the future because if the amount is gaining interest it will be worth more everyday than the day before.

Chapter 13 is titled “saving, investment, and the financial system” and introduces the financial institutions in the US economy, which consists of financial markets, such as bonds and stocks, and financial intermediaries, such as banks and mutual funds. It also discusses saving and investment in the national income accounts and the market for loaning funds and its three policies, saving incentives, investment incentives, and government budget deficits and surpluses.

Private saving is the amount that households have left after paying for taxes and consumption. Saving is made up of private and public saving and equals investment, therefore a change in private saving would change the amount that investment must be. It is important for individuals to save in an economy because saving is a long-run determinant of a nation’s productivity, which would mean more resources would be available or capital accumulation, GDP would grow more rapidly and eventually citizens would enjoy a higher standard of living. Public policies, such as tax policies, negatively affect savings rates because people are discouraged to save since their income is taxed. If there was reform of the tax laws, as policy 1: saving incentives, states of the market for loaning funds, this would encourage greater savings and as a result there would be lower interest rates and greater investment. Government budget deficits means there is an excess in spending over tax revenue, and causes interest rates and investment to fall because it reduces national saving.

Crowding out is a decrease in investment that results from government borrowing. In an article titled “Trump tax cuts: a little good old-fashioned crowding out,” the author, Dean Baker, a senior economist at the Center for Economic and Policy Research, expresses how big of a problem really is. He explains how this leads to increased interest rates which reduces demand in interest sensitive sectors and makes US goods less competitive internationally, which leads to a larger trade deficit and also reduces demand. This article shows that the biggest challenge is finding a way to reverse and to prevent crowding out. While keeping interest rates low would be preferable, and would reduce unemployment, this could result in very high inflation. The article focuses mostly on housing and the effect that crowding out has on it, that homes are not affordable anymore due to high mortgage interest rates or because they decide to pay more that they have less money to invest or spend on other things. Especially after reading this article I find crowding out to be a big problem because of the result it has on so many sectors of the economy and even other economies in the world that can cause permanent damage.

Chapter 12 is titled “production and growth” and begins by discussing economic growth around the world. It goes on to introduce productivity, which is the quantity of goods and services produced from each unit of labor input, and that it is determined by physical capital, human capital, natural resources, and technological knowledge. It continues to discuss economic growth and public policy by focusing on saving and investment, diminishing returns and the catch-up effect, investment from abroad, health and nutrition, property rights and political stability, free trade, research and development, and population growth.

Human productivity is affected by the four factors I have listed above. Physical capital is the stock of equipment and structures used to produce goods and services, and the more that is available and the better quality they are the more productive people can be. Human capital is the knowledge and skills workers have and by being more educated, trained and experienced the better they will be at understanding what they should do and doing it efficiently. Natural resources are the inputs into the production of good and services that without they would not be able to produce any outputs. Finally, technological knowledge is society’s understanding of the best ways to produce goods and services, which is always advancing, and the more advanced this is the more productive people will be able to be.

Public Policy definitely affects the availability of resources people need to be productive in all the ways listed above that monitor growth. The economy and the world is always advancing and if our country is not growing with it, due to a restriction from public policy or not having the best available resources and information, they will not be as productive and will not be as competitive. An example of a public policy that could either inhibit or promote long-run productivity growth is research and development. If the government does not encourage this then there is no way for the country and different industries to be able to have any improvement in the factors of production, especially technology. Without these changes they could fall behind in global production and could not be as efficient as they should be by not making changes or looking into better way to increase output.

Chapter 19 is titled “a macroeconomic theory of the open economy” and introduces a new model that shows the supply and demand for loanable funds and for foreign-currency exchange. If I were to test on three questions about this chapter they would be…

1. Do you believe that overall the government budget deficit is only bad for the economy?
   1. Adequate response: This answer should express opinions of the benefits and negatives of the deficit and give some explanation that, at the very least, it reduces national saving and therefore reduces the supply of loanable funds.
   2. Very good response: A better response would build upon this by expressing both the benefits and negatives of the deficit and that although there is a reduction in loanable funds and also crowd out domestic investment, cause the currency to appreciate and push the trade balance towards deficit, there is also the benefit that that it raises real interest rates which causes net capital outflow to fall. This is a better answer because it shows it isn’t all good or bad but there are trade-offs.
2. What variable links these the two markets of foreign-currency exchange and loanable funds together and why?
   1. Adequate response: This answer would need to express net capital outflow to receive any points.
   2. Very good response: This answer would clearly express net capital outflow and would ideally present the two equations S=I+NCO and NCO=NX. In the market of loanable funds supply comes from S and demand comes from NCO and I, with the real interest rate balancing supply and demand. In the market for foreign-currency exchange supply is NCO and demand is NX, with the real exchange rate balancing supply and demand.
3. How does trade policy affect the trade balance?
   1. Adequate response: This must express that trade policies do not affect the trade balance to receive any points.
   2. Very good response: This would explain that trade policies do not affect the trade balance and would continue to describe that this is because there is an increase in the demand for dollars which causes the real exchange rate to appreciate. However, nothing happens in the market for loanable funds and therefore there is no change in the real interest rate, meaning that there is no change in net capital outflow. Because there is no change in net capital outflow, and NCO=NX, there is no change in net exports.

Chapter 11 is titled “measuring the cost of living” and introduces the consumer price index, which measures the overall cost of the goods and services bought by a typical consumer. It goes on to compare the CPI to the GDP deflator and how to correct economic variables for the effects of inflation, such as dollar figures from different times, indexation, real and nominal interest rates.

Where I live the cost of living is extremely high, however, I was born in this town and have lived here my whole life so it was never really my decision to live here or not. When my parents moved to this town the living costs were definitely not as much as they are now, but there were also other reasons why they moved here and why they have stayed.

It is hard to change the rate of inflation by changing what is purchased because all of the items in the economy have been influenced by inflation, although some may have changed more than others according to the substitution bias. It would be much more realistic to change the rate of inflation by purchasing at a different time rather than buying a different item. This is a serious overestimate problem of CPI because it sets a fixed cost to the basket of goods although the prices are changing and by different amounts. There are many times that I will time purchases around sales, especially times like cyber monday and seasonal sales, such as before Christmas and the new school year. A lot of times I will also change my purchases because of sales because something that would have been too expensive before could have come into my price range. When the prices are lower you can buy more items for the same amount as it would have been before.

The improvement of goods is serious in some markets and less serious in others. For example, the market of technology, particularly phones and computers is advancing so rapidly that it causes a problem in measurement, however this may not be as much of a problem for other goods, such as food that won’t change that much. If your raise is 2% and the rate of inflation is 2% you do break even, but you are in the same place economically as you were before the change and therefore are not better or worse off but have just shifted with the economy.

Chapter 18 is titled “open-economy Macroeconomics: basic concepts.” My three favorite margins notes are…

1. I highlighted section e1 titled “summing up” because it summarized the lesson that had been taught to that point in the textbook in a more simplified version. This was a great way to be able to check that I was understanding the material I had learned to that point because I feel like it can be very challenging to retain so much information and that I’m not always sure what I understand and what I don’t. This separated everything into three parts: trade deficit, surplus, and balanced trade.
2. I also highlighted the end of section 1c titled “the equality of net exports and net capital outflow” for a similar reason as my first note because I feel that it did a good job of summarizing the section. I was a bit confused by the concepts in this section and found that I had to reread it a few times and even look up some of the previous terms to understand it. The part I highlighted are two bullet points which introduce trade deficit and trade surplus that provides a simplified equation and an example.
3. Finally I highlighted the last paragraph in section 2b titled “real exchange rates” which gives another description of depreciation and appreciation how they relate to individuals and how they influence and are affected by the changes in trade. I found this section very helpful because it summarizes the section and also gives an example that I can personally relate to and shows my relationship to what is being taught.

These were the notes that I found most useful, however, the other ones that I have taken on this section mostly consist of equations, definitions, and examples.

Chapter 17 is titled “money growth and inflation” and introduced inflation and the quantity theory of money, that as the quantity of money and the price level rises, the value of money falls. This leads to classical dichotomy, which is the separation of nominal values, measured in monetary units, and real values, measured in physical units, and monetary neutrality, which means that real variables are not affected by changes in the money supply. The chapter continues with the quantity equation, quantity of money times the velocity of money equals the price output times the amount of output, the inflation tax, the revenue the government raises by creating money, and the fisher effect, when the rate of money growth the long-run effect is higher inflation rate and higher nominal interest rate. The chapter concludes with the costs of inflation and deflation.

The costs of inflation are the shoeleather costs: the resources wasted when inflation encourages people to reduce their money holdings, menu costs: the costs of changing prices, increased variability of relative prices, unintended changes in tax liabilities, confusion and inconvenience, and arbitrary redistribution of wealth. I believe the worst to be inflation-induced tax distortions because it exaggerates the size of capital gain therefore increasing the tax burden on that income. As this raises the tax burden on saving, it could then depress the economy’s long-run growth rate. Deflation also faces menu costs and relative-price variability, however it is much less steady and predictable and leads to a redistribution of wealth away from debtors towards creditors. This would be a big problem for households because it would take more money from them, although they have less wealth. I agree with the Federal Reserve Board to worry more about deflation because it usually arises because of a bigger economic issue which reduces the overall demand for goods and services, which can lead to falling incomes and rising unemployment.

Chapter 16 is titled “the monetary system” and outlines what money is, the different forms and uses of it, and the central center of money in the United States, the General Reserve.

Cash is a medium of exchange and is probably the most important one because it is the most liquid, meaning that it can most easily be converted into the economies medium of exchange. However, cash is not the only aspect of the money supply because it is also made up of demand deposits. The Federal Reserve Board has some control over the money supply and is related to the Federal government because it is made up of governors appointed by the president and is the central bank of the country so it oversees the banking system and regulates the quantity of money for the US economy. They have recently been pushing up interest rates so that it is more expensive to borrow money from a loan, which reduces spending and economic growth. This can also be a result of an increase in inflation.

The Federal Reserve Board may not be directly impacted by every political decision and may seem to have freedom to make their own decisions as long as laws are not being passed that directly affect the Fed or anything concerning the economy. However, they may have to make decisions that parallel their political party, especially if they are still serving for the President who put them in office. I believe that they are as insulated as they can be, however there is not way to completely separate them if they are still elected by the president and have clear political views. President Trump should not have the power to fire Jerome Powell because, although he may not represent Trump’s views or make the same decisions as Trump would, he represents that of another president and other people and unless he makes an actual error beyond just having different beliefs the new president should not have the power to fire the board. I believe that the Board would be better managers of the economy if they had more accountability to Congress because it would allow them to make more decisions for themselves which they believe is better for the country that is removed from political views and the agendas of Congress.