What is the theory of liquidity preference and how does it help explain the downward slope of the aggregate demand curve?
That all else being equal, people prefer to hold on to cash (liquidity) and that they will demand a premium for investing in non-liquid assets such as bonds, stocks, and real estate. The theory suggests that the premium demanded for parting with cash increases as the period (term) for getting the cash back increases. Interest rates adjust to balance supply and demand, creating a downward slope of the aggregate demand curve.
Use the liquidity preference theory to explain how decreases in the money supply affect the AD curve.
An increase in the money supply shifts the money supply curve to the right. When the Fed increases the money supply, it lowers the interest rate and increases the quantity of goods and services demanded at any given price level, shifting aggregate demand to the right. When the Fed decreases the money supply, it raises the interest and reduces the quantity of goods and services demanded at any given price level, shifting aggregate demand to the left.
Give an example of a government policy that acts as an automatic stabilizer. Explain why the policy has this effect.
Automatic stabilizers are a part of the structure of the economy that work to limit the expansions and contractions of the business cycle. Taxes act as an automatic stabilizer. As an expansion: The progressive nature of income taxes automatically act to stabilize a business-cycle expansion, limiting the upswing of a business cycle that might tend to cause inflation. As a contraction: The progressive nature of income taxes also automatically stabilize the downswing of a business-cycle contraction. As the economy declines, and aggregate income falls, people pay a decreasing portion of income in taxes.
Friday, June 22, 2012
Saturday, June 16, 2012
Chapter 30 Homework- The Monetary System
Chapter 30 Homework
What do we mean when we say, "money is whatever society says it is?"
Anything with ‘use value’ and ‘exchange value’ can be accepted by the public as means of payment.
Describe the components of M1, M2 and M3. In general, how do they differ?M1- cash and checking account deposits (measures all currency in circulation)
M2- M1, small deposits, saving accounts and money market accounts (step higher than M1 and less liquidity)
M3- M1 and M2, large deposits, other large long term deposits (step higher than M2 and even more less liquidity)
What is "the Fed" and its main purpose?
The Fed is the Federal Reserve System, the central bank of the United States. It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. It's 2 main functions are to regulate banks and ensure the health of the banking system and to control the quantity of money that is made available in the economy called money supply.
Take a look at the following banking in-class demonstrations. Pick one of the three demos to perform with some friends, relatives, or other persons who owe you a favor:-) You are to act as the teacher in the demonstration and you are to attempt to teach the group the concept the demonstration is attempting to illustrate. Once the role playing is completed, answer the following questions.
Which demonstration did you choose and why?
I chose the Inflation Fairy to give me a better understanding of how inflation works because that is one of the terms I least understand.
Give a general description of your volunteers - approx age, gender, etc.
My Dad- age 55, male
My Friend- age 21, male, teammate
How did the demonstration go overall?
Well my Dad and my teammate are both smart when it comes to economics, so they understood the overall concept of the demonstration.
Did the volunteers seem to understand the concept being demonstrated? Why or why not?
They did understand the concept being demonstrated. Showing how people are affected if everything doubled, was a good way to prove how it wouldn't affect them. It made the explanation of, who are the winners and losers of inflation, easier.
Add any other comments you feel are relevant.
Did you enjoy this exercise and did you learn anything new by performing the demonstration? Why or why not?
I understand inflation better than I originally did. Showing the who are the winners and losers of inflation helped me understand the concept of inflation better than how I known it before. I also learned that doubling everything, will do nothing to the economy.
What do we mean when we say, "money is whatever society says it is?"
Anything with ‘use value’ and ‘exchange value’ can be accepted by the public as means of payment.
Describe the components of M1, M2 and M3. In general, how do they differ?M1- cash and checking account deposits (measures all currency in circulation)
M2- M1, small deposits, saving accounts and money market accounts (step higher than M1 and less liquidity)
M3- M1 and M2, large deposits, other large long term deposits (step higher than M2 and even more less liquidity)
What is "the Fed" and its main purpose?
The Fed is the Federal Reserve System, the central bank of the United States. It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. It's 2 main functions are to regulate banks and ensure the health of the banking system and to control the quantity of money that is made available in the economy called money supply.
Take a look at the following banking in-class demonstrations. Pick one of the three demos to perform with some friends, relatives, or other persons who owe you a favor:-) You are to act as the teacher in the demonstration and you are to attempt to teach the group the concept the demonstration is attempting to illustrate. Once the role playing is completed, answer the following questions.
Which demonstration did you choose and why?
I chose the Inflation Fairy to give me a better understanding of how inflation works because that is one of the terms I least understand.
Give a general description of your volunteers - approx age, gender, etc.
My Dad- age 55, male
My Friend- age 21, male, teammate
How did the demonstration go overall?
Well my Dad and my teammate are both smart when it comes to economics, so they understood the overall concept of the demonstration.
Did the volunteers seem to understand the concept being demonstrated? Why or why not?
They did understand the concept being demonstrated. Showing how people are affected if everything doubled, was a good way to prove how it wouldn't affect them. It made the explanation of, who are the winners and losers of inflation, easier.
Add any other comments you feel are relevant.
Did you enjoy this exercise and did you learn anything new by performing the demonstration? Why or why not?
I understand inflation better than I originally did. Showing the who are the winners and losers of inflation helped me understand the concept of inflation better than how I known it before. I also learned that doubling everything, will do nothing to the economy.
Thursday, June 7, 2012
Chapter 24 Homework
What is the CPI and what is its purpose?
Fix the basket at 3 footballs and 4 basketballs.
Compute the cost of the basket:
Cost in Year 1= $78
Cost in Year 2= $96
Cost in Year 3= $114
Using Year 1 as the base year, compute the index:
CPI in Year 1= 100
CPI in Year 2= 123.07
CPI in Year 3= 146.15
Compute the inflation rate:
Inflation rate for Year 2= 23.07%
Inflation rate for Year 3= 18.75%
Take a look at the following link. Notice all the different measures of a country's "Standard of Living." Which do you think is the best measure and why?
I prefer the median household income because this statistic gives an idea of how much money each household is bringing in, in a particular country. Shows how poor or rich the people in a country are that own a house compared to other countries around the world. In the chart from the link, some states in the U.S. are singled out, probably because of their high median household income, as a state alone, are as high as some countries. Connecticut having the most median household income and California is third.
Fix the basket at 3 footballs and 4 basketballs.
Year
|
Price of Footballs
|
Price of Basketballs
|
Year 1
|
$10
|
$12
|
Year 2
|
12
|
15
|
Year 3
|
14
|
18
|
Compute the cost of the basket:
Cost in Year 1= $78
Cost in Year 2= $96
Cost in Year 3= $114
Using Year 1 as the base year, compute the index:
CPI in Year 1= 100
CPI in Year 2= 123.07
CPI in Year 3= 146.15
Compute the inflation rate:
Inflation rate for Year 2= 23.07%
Inflation rate for Year 3= 18.75%
Take a look at the following link. Notice all the different measures of a country's "Standard of Living." Which do you think is the best measure and why?
I prefer the median household income because this statistic gives an idea of how much money each household is bringing in, in a particular country. Shows how poor or rich the people in a country are that own a house compared to other countries around the world. In the chart from the link, some states in the U.S. are singled out, probably because of their high median household income, as a state alone, are as high as some countries. Connecticut having the most median household income and California is third.
Consider the market for minivans. For each of the events listed below, identify which of the determinants of demand or supply are affected. Also, indicate whether demand or supply increases or decreases and the resulting effect on price and quantity demanded.
People decide to have more children.
People decide to have more children.
As people decide to have more children, they will need cars to fit these children in. Minivans are a popular vehicle for people having many children. Demand for these minivans will increase and when demand increases, so will supply to meet the demand for the vehicle. This will affect all 5 of the demand determinants that include income, preferences, other prices, buyer's expectation, and number of buyers; and only the prices for supply determinants. Prices of the minivans should rise because of the rise of quantity demanded.
A strike by steelworkers raises steel prices.
This strike by steelworkers that raises steel prices will likely increase the price of minivans since they are made from steel. Therefore, supply and demand will decrease. Supply will be less because it will cost more to produce these minivans, raising the price to sell the minivans, which will decrease the demand. Under demand determinants, income, buyer's expectations, number of buyers will be affected; and under supply determinants, prices, seller's expectations, and number of sellers will be affected. The price of the minivans will increase to make a profit and will decrease soon because of the low demand for the minivans. Quantity demanded will decrease with the higher prices.
The price of sport utility vehicles rise.
Sport utility vehicles are SUV's that provide space just like the minivan. With the rise in cost for the SUV's, minivans would be the best alternative, causing a higher demand for the minivans. Determinants of demand affected are preference, other prices, and number of buyers; determinants of supply affected are other prices and seller's expectations. The price of the minivans will remain the same to have the competitive edge over the SUV's since the price of the minivans will be lower. Quantity demanded will increase because more people will be able to afford a minivan compared to a SUV.
A stock market crash lowers people's income.
When there is a stock market crash that lowers people's income, the demand for minivans will decrease. People won't have the money to afford the vehicle. This will affect the income and number of buyers of the demand determinants; and seller's expectation of the supply determinants. The price of the minivans will likely decrease to allow people to be able to buy the minivans or the price will remain the same for people who can still afford the vehicle. Quantity demanded will decrease for sure.
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