EC1208 MCQ

Public Ledgers

can't cheat system, serial code number, A blockchain is a form of public ledger, which is a series (or chain) of blocks on which transaction details are recorded after suitable authentication and verification by the designated network participants. The recording and storage of all confirmed transactions on such public ledgers start right from the creation and start of a cryptocurrency's working. As a block is filled to capacity with transaction details, new ones are mined and are added to the blockchain by the network participants called miners.

A Closer Look At Ireland's Current Account

chart on 4.1 •Data from the most recent Quarterly Economic Commentary shows that Ireland's current account balance this year will be €30.8 billion. • •This compares much less favourably to our projected trade surplus of €91 billion. looks like 90b, actually 30b

economic model

built upon assumptions ex: we might assume full employment, fixed labor supply, or no trade between countries

positive statement

can be tested using scientific method. It can be confirmed, refuted or shown to be not provable either way. A positive statement does not have to be true. about how the world works

economy in distress

run on the bank line up to get money (northern rock)

normative statement

is a valued judgement; includes her opinion as to how the world ought to be. It is not possible to test valued judgements; Our positive views might influence our normative views

Gross Domestic Product or GDP

the totoal monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of the country's economic health•. Irish GDP measures the flow of Euros in our economy. •GDP measures all economic activity in a given geographic area and can typically be measure in three different ways. 1.Total production of domestically-produced final goods and services. (everything made) 2.Total expenditure on domestically-produced final goods and services. (everything spent) 3.Total income earned by domestically-located factors of production. (money in people's pockets) all three are about production

If Ireland were a Closed Economy...

•According to the ESRI, if Ireland were a "closed" economy, GDP in 2018 would be €260 billion. That's almost €86 billion less than the actual figure. • •The €352 billion of imports and €438 billion of exports would never have entered or exited the country. -shrink by 2/7 if closed •What impact would this have on our economy? -negative, surge in unemployment, gov't expenditure •The European Union is very much central to what Ireland is about as an economy. -political, not really economical reason for brexit, really good for ireland

Current Balance - CA*.

•As a response the Central Statistics Office has developed a modified Current Balance - CA*. This adjusts for depreciation of capital assets sometimes held outside Ireland and owned by Irish resident foreign owned firms, e.g. intellectual property (IP) and leased aircraft, alongside the repatriated global income of companies that moved their headquarters to Ireland (e.g. redomiciled firms or corporate inversions). •It is possible to have a zero or even negative current account balance, but a positive trade balance. • •Alternatively, a country may have a negative trade balance (importing more than exporting) but a positive current account balance.

Consumption

•Consumption occurs when we spend money on food, clothing or going to the cinema and is directly link to income levels. • •Income levels drive disposable income (Yd). Yd is equal to total income (Y) minus total taxes (T): •Consumption therefore depends directly upon disposable income. The higher the level of disposable income, the greater consumption. • •Therefore we can express the consumption function as: • C=f(Y-T)

ECB Interest Rates

•ECB rates are at record lows. They started to tumble in late 2007 yet Ireland saw little investment from 2008 to 2015. •How can this be so if I = I (r )? ECB almost giving free money to banks. charging money to put money in bank -don't want banks hoarding money, want them to lend

Fiscal policy

•Fiscal policy concerns two broad areas: -Taxation and Expenditure in ireland, decided by budget Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. The two major examples of expansionary fiscal policy are tax cuts and increased government spending. Both of these policies are intended to increase aggregate demand while contributing to deficits or drawing down of budget surpluses

Is GDP Appropriate for Ireland?

•For many years economists, policymakers, politicians and the media have speculated as to which measure of economic activity Ireland should use. The reason for this is due to the limitations exposed from using GDP as an measure of economic activity for the Irish State. • •According to the Central Statistics Office (2019) "not all of the incomes earned in the economy remain the property of residents". • •Why is this the case? Primarily because Ireland is very "open". • •By this we mean Ireland engages in vast quantities of international trade each year.

Leprechaun Economics: John Fitzgerald

•Former Head of the Economic Social and Research Council, Prof. John Fitzgerald explains that "The problem is that the profits flow back out because they don't belong to us...But...the depreciation on their intellectual property gets left behind in the accounts...If you look instead at a measure called Net Domestic Product (NDP), which takes out depreciation, [Ireland] grew by 6.5% last year." • •What is the solution? ••The answer. A new indicator called Gross National Income or GNI.

Government Spending

•Government expenditure includes exchequer spending on goods and services. This is not to be confused with the government's spending in the Budget, which is much bigger, as the Budget includes transfer payments (pension, etc). • •For simplicity, in our closed economy model, we will assumes that government spending and total taxes are exogenous and fixed. Hence, we can say G=G overbar T=T overbar • •When T > G budget surplus = public saving. •When T < G budget deficit = public saving is negative, so the national debt increases. (case in IE)

A New World Order

•Having dominated the global order, the United Kingdom's place in the world started to change after World War 1 ended in 1918. • •The UK experienced a recession from 1920 to 1924. This was followed by the Great Depression of 1930 to 1934. • •As this time, John Maynard Keynes started to become a very influential government policy adviser on the back of his Economic Consequences of the Peace (1919). In 1936 Keynes published his most famous book The General Theory of Employment, Interest and Money. •

depression

•If a contraction continues for a greater number of quarters, and is more severe, it could be described as a depression.

•Trade Balance (NX)

•If savings are greater than investment, exports are greater than imports, a trade surplus exists, and NX is positive. e.g. China, France, Germany, Ireland. •If investment is greater than savings, imports are greater than exports, a trade deficit exists, and NX is negative. e.g. United States, United Kingdom.

•Capital Flows (S - I)

•If the net capital flow is positive savings exceed investment. •If net capital flow is negative investment exceeds savings. •Therefore, the international flow of income (S - I) and the international flow of goods (NX), are two sides of the same coin.

Rewinding to 1776...

•In 1776, the "Father of Economics" Adam Smith wrote An Inquiry into the Nature and Causes of the Wealth of Nations. The text is broken into five "books" which implicitly address the factors of production. first book in economics, thesis on growth

International Capital Flows

•In an open economy a country can spend more than it produces by borrowing from abroad or it can spend less than it produces and lend the difference to foreigners. • •The national income accounts identity is now written as Y= C+I+G+ (X-M) Y=C+I+G+NX we can rearrange this expression to read: Y-C-I-G=NX

The Open Economy

•In our closed economy, expenditure was equal to output, investment was equal to savings and there were no exports or imports. • •We now transform the national income accounts identity to become: Y = C + I + G + (X - M) •In our open economy, expenditure need not equal output, saving need not equal investment and trade flows are possible.

Quantitative Easing

•Interest rates are not the only tool at the ECB's disposal. The bank can "print" money. • •This is known as quantitative easing (QE), and is a policy where the ECB buys predetermined amounts of government bonds or financial assets in order to stimulate the economy. • •On the 22nd January 2015 the ECB announced an 'expanded asset purchase programme'. The bank started to buy €60 billion per month of euro-area bonds from governments, agencies and European institutions. Mario Draghi ECB President: led charge on interest rate decline

Ireland's Trade Balance and Capital Flows

•Ireland has a trade surplus. Recent national accounts data value exports at around €438 billion and imports at around €352 billion. This means a trade surplus of some €86 billion. • •Does Ireland have a net capital inflow or €86? The answer is no. • •But if Ireland's NX is €86 billion, how can a country with a large trade surplus report a smaller net capital inflow? • •Like many economic indicators in Ireland, the answer to what appears to be contradictions in economic theory, can be found by examining multinationals operating in the State...

Problems from Ireland's openness

•Ireland's openness poses problems when calculating national output. There are a number of reasons why this is problematic. • •Firstly, it is difficult to plan the Budget when GDP figures are not an accurate reflection of national income. • •Secondly, it is equally difficult to measure national debt as a proportion of national output. (measured as a percent of GDP, appears debt is lower than it is) • •Thirdly, our international reputation is at stake. Bodies such as the European Commission try to measure our economic activity for international comparison purposes. This has implications for Irish Government bonds, interest rates, etc.

The Four Factors of Production

•Land - The entire surface of the earth including all natural resources. •Labour - All human resources. •Capital - Anything man-made which aids the production process. •Enterprise - The person who organises the first three factors and takes risks. •smith was first to identify these

Monetary policy

•Monetary policy concerns the two broad areas of: -Interest Rates and Money Supply -ireland doesn't control, Eurozone monetary policy through which a central bank influences a nation's money supply. Some monetary policy examples include buying or selling government securities through open market operations, changing the discount rate offered to member banks or altering the reserve requirement of how much money banks must have on hand that's not already spoken for through loans.

•Is a trade deficit a national problem?

•Most agree that it is a symptom of a problem such as low national savings. However, a trade deficit may simply be run in order to develop an economy. South Korea ran trade deficits throughout the 1970s an is now considered a modern economy. US -dems try to reduce trade deficit -rep. spend money and tax cuts --The world's largest debtor nation

Managing the Economy

•Most governments have at their disposal two main weapons to manage the economy. These are: 1.Fiscal Policy 2.Monetary Policy

The Current Account

•Multinationals cause large capital inflows and outflows to and from Ireland. This is the reason for the large gap between Irish GDP (€310 billion) and GNP (€254 billion) in 2018. • •The smaller GNP figure indicates that more money flows out of the country than follows back in hence Ireland has a negative net factor income from abroad. This is largely caused by the repatriation of profits by multinationals to their home countries. • •Savings minus Investment (S - I) is effectively the current account. This is much smaller for Ireland even though the country has a trade surplus of €86 billion. To understand why we need to expand S - I, or the current account, to reflect reality.

Equilibrium in the Economy

•Note that only the interest rate r is not determined in the last equation. It must adjust to ensure the demand and supply for output equal each other. • •In theory, if the interest rate is too high, investment is too low and demand for output falls short of supply. If the interest rate is too low, investment is too high and demand exceeds supply. 4.1 graph

Illegal State Aid - Apple & Ireland

•On the 29th of August 2016, after a two-year investigation, Margrethe Vestager of the European Commission announced "Ireland granted illegal tax benefits to Apple". • •The Commission ordered Apple to pay €13 billion, plus interest, in unpaid Irish taxes from 2004 to 2014 to the Irish State. On the 7th of September 2016, the Irish State reject payment of the back-taxes. • •In November 2016, the Irish government formally appealed the ruling, claiming there was no violation of Irish tax law, and that the Commission's action was "an intrusion into Irish sovereignty", as national tax policy is excluded from EU treaties. (preventing further integration into EU, do control fiscal policy-IE •Also in November 2016, Apple CEO Tim Cook, announced Apple would appeal the ruling of the European Commission. However, by September 2018, Apple had lodged €13 billion to an escrow account (not spent), pending appeal. • •In May 2019, the Department of Finance said that defending the Apple case, had cost the Irish state €7.1 million in mostly legal fees. • •It is now estimated that case may take a decade to reach a final verdict.

The Rise and Decline of Nations?

•One possible explanation is proposed by American economist MancurOlson who believed over the long run states tend to suffer as institutional sclerosis set in, ossifying once flexible and efficient institutional structures. • •Olson (1982:77) suggested: -"Countries that have democratic freedom of organisation without upheaval or invasion the longest will suffer the most from growth-repressing organisations and combinations. This helps explain why Great Britain, the major nation with the longest immunity from dictatorship, invasion, and revolution, has had in this century a lower rate of growth than other large, developed democracies". • -don't get change, interest groups form and prevent things from happening -stable democracies with suffer the most -britain same since 1690

International Capital Flows and the Trade Balance

•Output (Y) minus what we spend on consumption (C) and government expenditure (G) leaves us with national savings (S). Therefore: Y-C-G=S The economy is: Y=C+I+G+NX therefore, Y-C-I-G=NX and, Y-C-G=I+NX hence: S=I+NX or: S-I=NX where: NX=trade balance S-I=net capital flows

Small Open Economy at Equilibrium

•Policy Decision 1 - A fiscal expansion at home. Fiscal policy has two elements; taxation and expenditure. An expansion means either cutting taxes of increasing expenditure. • •Policy Decision 2 - A large foreign nation decides to pursue a fiscal expansion by either cutting taxes or increasing expenditure. graph 4.2 interest rates high, investment low

Circular flow of income

•Put simply, for the economy as a whole, income must equal expenditure. Expenditure must equal production. And therefore production must equal income. This basic model ignores leakages such as savings, imports and repatriation of profits. picture in 2.1

Why Are Wages Not Growing?

•Since the early 1970s, the hourly inflation-adjusted wages received by the typical worker have barely risen, growing only 0.2% per year. • •Some of this can be explained by secular stagnation. This theory refers to a condition of negligible economic growth in developed economies. -rich countries become stagnant, have they reached a limit? •But this can't be correct, can it? • •Since the late 1990s we have experienced a technological revolution. This increase in productivity has surely made workers more productive. • •If this logic is correct, why have average wages not rise accordingly? -laborers have not gotten a bigger slice of the pie

Small Open Economy

•So far we have analysed how the international flow of goods and financial assets interact with each other. • •Our next step is to develop a model to answer questions such as how the trade balance responds to policy changes within a country. • •We assume a small open economy (just like Ireland) with perfect capital mobility where a country can run either a trade surplus or trade deficit. • •'Small' means that the economy is part of a world market and has a very insignificant role regarding the setting of a world interest rate. 'Perfect capital mobility' means that the country can freely access world financial markets.

Introduction to Business Cycles

•So far we have considered general macroeconomic indicators and the long-run determinants of economic growth. In this section we want to consider short-term fluctuations. •It is fair to say economies grow in the long-run. As a civilisation we have never been as wealthy as we are right now. However, the general upward trend in GDP is often punctuated by periods of instability and upheaval. •Periods of expansion (growth) and slowdown (recessions) are referred to as business cycles.

The Closed Economy

•The "closed" economy is, in a practical sense, the same as the domestic economy. It is captured by the first three elements of national income accounts identity so that it can be expressed as: Y=C+I+G •(competition+ investment+ gov't) •Effectively, this expression eliminates trade and "closes" the economy. • •Together these components determine aggregate demand in the economy and capture domestic: -Consumer demand for goods & services (C) -Demand for investment goods & services (I) -Government demand for goods & services (G)

The Great Depression

•The Great Depression continues to dominate much of economic thought today. Remember from 1776 until 1929, economists were generally guided by free market principles, supply-side policy and the invisible hand. • •However on the October 29th 1929 the Dow Jones Industrial Average lost $14 billion dollars or 12% of its value. Losses for the week hit $30 billion, ten times more than the annual budget of the US Federal Government, and far more than the US had spent in all of World War I. • •The Wall Street Crash, as this was known, was one of the most devastating stock-market crashes in American history and sparked the Great Depression. •

•How much national income do the factors of production (L and K) receive?

•The answer to this question is based on the Classical (18th century) invisible hand theory and also on the 19th century Neoclassical Theory of Distribution. -(let the market decide, people will get job because they will starve otherwise) •According to both, the distribution of national income is determined by factor prices. • •Factor prices are the amounts paid for the factors of production. In our economy of K and L, factor prices are simply rent (r) paid for capital and wage (w) paid for labour. The price paid for each factor depends on demand and supply.

Production Function

•The available technology within a country determines how much output is produced from the given inputs (K and L). We express the available technology as a production function, letting 'Y' denotes output. • •There we can assume: Y=f(K,L) •This function reflects how the available technology within a country turns labour (L) and capital (K) into output. Technological progress alters the production function and hence the need for countries to constantly innovate. 3.1 graph 1. the slope of the production function equals the marginal product of labor 2. as more labor is added, the marginal product of labor declines

Nominal Exchange Rates

•The exchange rate between two countries represents the price at which residents of both countries are prepared to trade with each other. The nominal exchange rate is the relative price of the currency between two countries. •When commentators refer to the exchange rate they are normally talking about the nominal exchange rate.

A General Overview of EU Competition Policy: •Treaty on the Function of the European Union (Lisbon Treaty).

•The legal basis of competition law is found in the Treaty on the Function of the European Union (Lisbon Treaty). • •It is implemented by the European Commission (most powerful body) and Council in the form of regulations and directives. The Commission now has particularly wide-ranging powers in the field considering cartel behaviour and dominance of power. • •The ultimately arbiter of the various rules is the European Court of Justice. It becomes involved in the case directly or in the case of appeals.

Leprechaun Economics, •How can the CSO explain a growth rate of 25% in one year?

•The numbers can be attributed to: 1. aircraft purchases registered, part of GDP 2. contract manufacturing invoice in ireland •This transfer of assets happened amid a global clampdown on multinational tax avoidance. Regrettably, the official figures were belittled internationally and damaged Ireland's reputation. 3. corporate restructuring; "company" established in IE, circumvent international tax code 4. moving or assets (especially patents) in capital/tax inversion deals; ex. apple patent

The problem with CA for Ireland

•The problem with CA for Ireland is that it cannot account for its status as a small and open economy with a high concentration of multinational enterprises. •Since 2015, even using Gross National Income (GNI), it has become increasingly difficult to interpret ouput due to the impact of mobile international assets and global firms re-domiciling their headquarters to Ireland.

Real Exchange Rates

•The real exchange rate is the relative price of the goods between two countries. This is sometimes known as the terms of trade. •Since the UK voted to leave the EU the euro has strengthened against the pound. However, the pound has now risen in value again. •British goods have become relatively cheaper in Ireland. However, domestic goods have become relatively more expensive in the United Kingdom.

real interest rate

•The real interest rate in the small open economy is not determined at home, by the intersect of savings and investment, but by the world interest rate. Due to the condition of perfect capital mobility the interest rate at home must be the same as the world interest rate. The world interest rate is referred to as r* hence we can say r = r astrix*. • •We are also going to make three further assumptions: 1.The economy's output is fixed (Y =Y overbar) 2.Consumption is depending upon disposable income C = f (Yd ) 3.Investment is dependent upon the interest rate (I = I (r *)) •Let's consider the impact of two policy decisions on our small open economy, one internal and one external.

Quantitative Easing pt II

•The stimulus was planned to last until September 2016, with a total QE of at least €1.1 trillion. (more than 5% of EU GDP •On the 10th March 2016, the ECB increased its monthly bond purchases to €80 billion from €60 billion and announced new ultra-cheap four-year loans to banks. QE would continue until the growing threat of deflation across the Eurozone had ended. • •The policy seemed to have worked. On the 30th of January 2018 the official statistics office of the EU Eurostat announced that the Eurozone economy grew at its fastest pace for a decade in 2017 with the economy of the 19-state bloc growing by 2.5%. • •However, data from 2019 suggests a slowing Eurozone economy... -probably from Brexit, QE might be in need again

"Capital in the Twenty-First Century"

•There is certainly some merit in this explanation but it still leaves much unexplained. • •Large wage gains have accrued to workers at the top of the distribution, but wages have been declining or stagnant for the bottom half of the income distribution. • •Piketty argues that the rate of capital (K) return is persistently greater than the rate of economic growth. -people that own capital is bigger than growth, workers can never catch up causing inequality to increase •That is what is causing wealth inequality to increase, and he is certain that this will continue into the future unless a solution, such as a progressive global tax on wealth, is introduced. -capitalism brought large portion of people to subsistence, wealthy even more

The Quantity of Inputs

•These are the inputs (factors of production) used to produce goods and services. The two most 'important' are capital (K) and labour (L).

Investment

•We assume a person can do one or two things with their money: (1)Invest the money (2)Save the money • •The investment function is then expressed as follows: I = I (r ) where r denotes the real interest rate, the nominal interest rate corrected for inflation. -investment level dependent on real interest rate -use money to invest, can you consume or save •The real interest rate is the cost of borrowing and the opportunity cost of using one's own funds to finance investment spending. Logically, it would follow that: increase r->decrease I interest rate (price of money)-> investment quantity (demand for money)

Small Open Economy and Exchange Rates

•What impact do policy decisions have on exchange rates in our small open economy model? -Policy Decision 1 - A fiscal expansion at home. -Policy Decision 2 - A large foreign nation pursues a fiscal expansion. graph 4.2

•If growth picks up in the coming months and years we can expect:

-An increase in consumption. -An increase in investment. -An increase in government spending. positive self reinforcing cycle

•We can probably also predict:

-An increase in inflation. -An increase in wages. -An increase in interest rates. • •If the slowdown gets worse, we can expect the opposite of what's above. (decrease)

•The causes of hyperinflation problems are generally rooted in monetary and fiscal policy mistakes. These include:

-Excessive government expenditure and inadequate tax system. -Governments is unable to borrow due to poor credit rating. (IE in 2010) -The printing of money (seigniorage) and growth in money stock.

It could be argued that economics at its most basic level is the science of decision-making. The process by which economists do this is:

1. Identify a problem or issue. Will taxing fizzy drinks, in order to reduce sugar intake amongst the general public, be efficient? 2. Consider the cost and benefits of the action; both private and social. Benefits - Reduction in obesity, longer life expectancy, healthier lifestyle; reduction in funding required for provision of public healthcare system, increased tax revenue. Costs - Reduction in consumption, increase in unemployment. 3.Value the costs and benefits Attempt to place a value on all costs and benefits. This is often not perfect but must be estimated. 4. Make a decision

•Bitcoin is different to traditional currencies for three main reasons:

1. exists only in electronic form 2. it has no lender of last resort 3. not supported by anything

if people lose confidence, where should one put money

1. gold 2. treasury bills (t-bills) 3. swiss franc 4. art 5. cash chances of dollar collapsing is low because it is most prevalent

Costs of Inflation

1. menu costs: transaction cost, cost of changing prices 2. shoe leather costs: more frequent trips to bank, time costs 3. inefficient allocation of resources: split year for cars 4. tax distortions: fixed tax meaningless with inflation 5. inconvenience 6. loan agreement problems 7. people living on fixed incomes eg. state pension •One benefit of inflation is that it does help the labour market to operate.

•The economy's output of goods and service depends on two key things:

1. quantity of inputs (factors of production) 2. its ability to turn its inputs into outputs (production function) ex. yemen bigger than ireland, more labor, not able to do this because wartorn

Problems with the CPI

1. substitution bias- the basket of goods is fixed, if the price of a good increases consumers can switch to an alternative 2. new goods- new tech in particular are not present in the fixed basket and the impact of these are not captured 3. quality changes-the quality of a good may rise or decline yet the price may stay the same (people less sensitive to quantity changes than price changes) 4. relevance- an aggregated measure over a wider variety of goods is crude at the individual level

•The two most common approaches to measuring inflation are :

1.GDP Deflator 2.The Consumer Price Index

Three Important Indicators For The Public

1.Gross Domestic Product (GDP) is the value of all final goods and services produced within an economy in a given period of time. (measuring size of economy) 2.The Consumer Price Index (CPI) measures the level of prices. (prices rise in long run, wages go up as well) 3.The Unemployment Rate tells us the fraction of workers who are unemployed. (affects everybody)

•The EU enforces competition policy by:

1.Outlawing anti-competitive behaviour between companies. 2.Regulating companies that could, by their size, engage in anti-competitive practice. ex. microsoft, trying withapple 3.Vetting mergers between independent companies that could lead to non-competitive market dynamics. ex. EU stoped two supermarket chains; ryanair can't have stock in aer lingus

•The most influential central banks on the planet are:

1.The European Central Bank (ECB) 2.The Bank of England -independent doesn't matter what is politically power, PM Tony Blair -Mervyn King (2003-2013) and now Mark Carney, not elected but impacts public talks about monetary policy 3.The Federal Reserve 4.The Bank of Japan 5.The People's Bank of China -growing in importance because growing economy

•Broadly speaking, there are three basic facts that an economic shocks or fluctuations exhibit.

1.They tend to be irregular and unpredictable. 2.Most macro indicators and quantities fluctuate together. 3.As output falls, unemployment rises. •In reality, these exogenous events shift the aggregate demand or aggregate supply. •The curve that is moved depends on the type of shock.

Aggregate Demand and Aggregate Supply curve

6.1 graph

exogenous variable

A variable whose value is determined outside of the model

endogenous variable

A variable whose value is determined within the model

in a large open economy, fiscal expansion will lead to

An increase in the real interest rate and decrease in investment and, Trade deficit and an appreciation of real exchange rate.

Classical School/Austrian School Views of The Business Cycle

Classical School/Austrian School •Supply Side -Assumes market clears. -Wages and prices will rise and fall to meet demand. -If wages fall, workers will supply less labour and visa versa. •Demand Side -Increase in demand, increases output. -Wages and prices will start to rise, with inflation the result. -Increase in labour costs, forces firms to reduce output so demand eventually returns to equilibrium at higher price level.

•As we said previously, there are generally two differing schools of thought as to how best to deal with economics shocks. We are going to broadly distinguish between the two groups as follows:

Classical economics: smith austrian school: hayek Chicago school of economics: Becker ^markets solve themselves Keynesian economics: Keynes ^interventionist New Keynesian economics: Mankiw ^technological shocks

Counter-Cyclical Policies

Counter-Cyclical Policies fiscal1.Increasing taxes in a boom. fiscal2.Decreasing spending in a boom. monetary3.Increasing interest rates in a boom. monetary4.Decreasing money supply in a boom. 5.Decreasing taxes in a recession. 6.Increasing spending in a recession. 7.Decreasing interest rates in a recession. 8.Increasing money supply in a recession.

Heterodox schools of thought

Critics of neoclassical approach; include Institutional Economics, Austrian Economics, and Marxist Economics

Real or Nominal Data

Data is quoted in both Real and Nominal terms -Nominal GDP measures economic output using current prices (no control for inflation); Changes in Nominal GDP can be due to changes in prices or changes in quantities of output produced (price or quantity) -Real GDP measures economic output using the prices of a base year (controls for inflation); Changes in Real GDP can only be due to changes in quantities, as it controls for inflation. -Real GDP is a far better measure of economic activity

Assumptions

Economics makes assumptions that often do not hold in the complex world we live in. These assumptions are part of the models and theories we use to understand the world around use. Assumptions allow us to consider the relationship between two or more variables, while holding other factors constant. The art of scientific thinking is to decide which assumptions are important and which are not.

Margrethe Vestager

European commissioner for competition said apple in ireland is anti competitive and getting illegal state aid

Hayek

Friedrich Hayek 1899 - 1992 Alma Mater - University of Vienna London School of Economics University of Chicago University of Freiburg •"In the long run [such manipulation of the economy] would bring about grave disturbances and the disorganisation of the economic system as a whole...the expediency of such attempts to alleviate unemployment by relief works and so on is in the light of this analysis highly unquestionable". Paradox of Saving (1929). • •"It should therefore be fairly clear that the granting of credit to consumers, which has recently been so strongly advocated as a cure for depression, would in fact have quite the contrary effect...the only way to permanently 'mobilize' all available resources is, therefore, not to use artificial stimulants - whether during a crisis of thereafter - but to leave it to time to effect a permanent cure". Prices and Production (1931). • •"If most people are not willing to see the difficulty, this is mainly because, consciously or unconsciously, they assume that it will be they who will settle these questions for the others, and because they are convinced of their own capacity to do this". Road to Serfdom (1944).

Okun's Law

In economics, Okun's law is an empirically observed relationship between unemployment and losses in a country's production. The "gap version" states that for every 1% increase in the unemployment rate, a country's GDP will be roughly an additional 2% lower than its potential GDP.

The Black Swan

Inductive reasoning - Observes swans in a river. Draws conclusion that "all swans are white". This theory is falsifiable. This is true of all theory in science. Deductive reasoning - Theory about why all swans are white is developed. Subsequent testing confirms this to be true. Economics has come in for criticism for claiming to be a science yet side-steps falsifiability when data rejects cherished theories.

Fastest Growing Economies Today...

Ireland number 4; •It is much easier to experience rapid economic growth when starting from an low absolute base. IE with countries with low living standards and is high on list because of misleading GDP

Keynes

John Maynard Keynes 1883 - 1946 Alma Mater - King's College, Cambridge •"We are stuck in a rut. We need an impulse, a jolt, an acceleration....let us experiment with boldness...even though some of the schemes may turn out to be failures". Does Unemployment Need a Drastic Remedy (1924). • •"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course by tendering for leases of the note-bearing territory), there need be no more unemployment and with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is". The General Theory of Employment, Interest and Money (1936). • •"Long run is a misleading guide to current affairs. In the long run we are all dead". A Tract on Monetary Reform (1923).

•Firstly, we are going to make two assumptions about capital and labour:

K=K overbar L=L overbar capital letter is whole economy 1.The over-bar means that each variable is fixed at some level. 2.The two factors are fully utilised - no resources are wasted. (no unemployment)

Keynesian School Views To The Business Cycle

Keynesian School •Supply Side -Assumes market can't clear due to sticky prices and sticky wages. -Excess demand or supply in labour market will not clear quickly. -Adjustment of wages downwards extremely difficult. •Demand Side -Increase in demand, increases output. -Wages and prices take time to adjust as they are sticky. -Over time economy will return to equilibrium as demand adjusts.

Functions of Money

Money has three functions in the economy which distinguish it from commodities such as stocks, bonds, property or art. •In order to be money, the three functions it must possess are: 1.A store of value. 2.A unit of account 3.A medium of exchange.

calculating nominal GDP

Multiply each year's Qs by Ps from same year.

calculating real GDP

Multiply each year's Qs by Ps from the base year.

newly expressed current account balance

NX+NFIA+NUT NX=net exports NFIA= net factor income from abroad ~profits from multinationals (negative for IE) NUT=net unilateral transfers ~foreign aid contributions with nothing in return

simple current account balance

S-I so we can say current account balance is NX This expression is still over simplistic because imports and exports are not the only reason money flows to and from the country.

Pro-Cyclical Policies

Pro-Cyclical Policies 1.Decreasing taxes in a boom. 2.Increasing spending in a boom. 3.Decreasing interest rates in a boom. 4.Increasing money supply in a boom. 5.Increasing taxes in a recession. 6.Decreasing spending in a recession. 7.Increasing interest rates in a recession. 8.Decreasing money supply in a recession.

Capital and Trade Flows

S-I=NX

What GDP Doesn't Account for...

Some of the Problems •Happiness or Health of the Population •Externalities e.g. pollution etc. •Quality of life •The Underground Economy •Unpaid Work •Sales of Used Goods The Solution - A quality-of-life index • •Material Well-being •Health •Political Stability & Security •Family Life •Community Life •Climate & Geography •Job Security •Political Freedom •Gender Equality •

The Investment Function

Spending on investment goods is a downward-sloping function of the real interest rate (hospitals, cars, roads) •Whether this explanation is true in reality is very much debatable. We need only look at the actions of the European Central Bank in recent times to find problems with our assumptions. 3.2 graph

The marginal propensity to consume

The marginal propensity to consume is the increase in C caused by a one-unit increase in disposable income. MPC is usually between 0 and 1. -earn 100 euro increase, 10 euro spend increase- MPC 1; save increase MPC 0 -high income, low MPC; low income, high MPC

Equilibrium Real Rental Rate

The real rental rate adjusts to equate demand for capital with supply. class struggle: roughly speaking, laborers get 2/3 of the pie; capital owners get 1/3 of the pie (smaller group) 3.1 graph

Can a subject that considers human behaviour ever be classed as a science?

There are two basic reasons for such disagreement: 1.Economists may disagree about the validity of alternative positive theories about how the world works. Judgement is critical here. (Higgs Boson in physics). 2.Economists may have different values, and therefore, normative views about what policy should try to accomplish.

Total expenditure on domestically-produced final goods and services is probably the most commonly used method and is calculated as follows

Y=C+I+G+ (X-M) Y= Total demand for domestic output (GDP) C=Consumption spending by households I=Investment spending by businesses and households G=Government purchases of goods and services (X-M)= Net exports or net foreign demand C+I+G= Domestic economy

Impact of Fiscal Expansion on Real Exchange Rate

a reduction in saving reduces the supply of dollars which raises the real exchange rate and causes net exports to fall graph 4.2

In a small open economy fiscal expansion will lead to

a trade deficit and appreciation in the real exchange rate

Gross National Product (GNP)

an estimate of total value of all the final products and services turned out in a given period by the means of production owned by a country's residents. GNP is commonly calculated by taking the sum of personal consumption expenditures, private domestic investment, government expenditure, net exports, and any income earned by residents from overseas investments, minus income earned within the domestic economy by foreign residents. Net exports represent he difference between what a country exports mins any imports of goods and services •The mostly widely used alternative measure is called Gross National Product (GNP). •GNP is the total income earned by a nation's factors of production, regardless of where they are located. •GNP = GDP +/- Net Factor Income from Abroad. •In Ireland, which would you expect is bigger, GDP or GNP? In Ireland's case, for many years, the amount belonging to persons abroad has exceeded the amount received from abroad, due mainly to the profits of foreign-owned companies. Our GDP therefore exceeds our GNP. GNP= GDP + net property income from abroad excludes income earned by multinational when profit is sent back to the other country

In a closed economy fiscal expansion will lead to

an increase in the real interest rate and decrease in investment

Impact of Fiscal Expansion Abroad on Small Open Economy

an increase in the world interest rate reduced investment and leads to trade surplus graph 4.2

Impact of Fiscal Expansion Abroad on the Real Exchange Rate in Small Open Economy

an increase in world interest rates reduces investment, which increases the supply of dollars...causes the real exchange rate to fall and raises net exports

Deductive reasoning

begins with a theory and leads to a hypothesis, which is then subject to testing by observation

A Fiscal Expansion in Small Open Economy

graph 4.2 economy begins with balanced trade, but when fiscal expansion reduces savings, a trade deficit results (S-I) negative= trade deficit then NX must be negative

A Look At The Business Cycle

graph 5.1

•When was Ireland last in recession?

june 2013

Equilibrium Real Wage

labor demand curve always downward sloping, The real wage adjusts to equate labor demand with supply. 3.1 graph

•By summer 2018 more than 100,000 companies accepted bitcoin as a means of payment. These include:

microsoft, virgin mobile, bloomberg, expedia, papa johns •Nearly 9 years ago, on the 22nd of May 2010, a programmer purchased two large Papa John's pizzas for 10,000 bitcoins, worth about $30 at the time.

The Consumption Function

min wage, always higher than job seekers benefit -relationship of consumption and disposable income is positive the slope of the consumption function is the MPC graph 3.2

nodes

miners, people mine bitcoin then distribute- supply limit capped a 21M, prevents inflation

"Double Irish with a Dutch Sandwich"

outlawed bermuda tax free subsidiary> license product>transferred to IE to inflate price>move to netherlands and back to IE before being sold

The Fisher Equation

real interest rate = nominal interest rate - inflation rate alternatively we could say: nominal interest rate= real interest rate + inflation •This relationship is known as the Fisher Equation, and is named after American economist Irving Fisher. •It is sometimes expressed as i= r + π or more appropriately as i= r + π^e (e = expected inflation rate)

Inductive reasoning

requires a process of observation to form patterns, which then support a hypothesis, leading to a theory

Empiricism

requires gathering evidence and data to test a hypothesis; use natural experiments and historical examples to test use inductive and deductive reasoning

Fiscal expansions

tend to lead to a trade deficit

Seasonal Unemployment

the demand for a specific kind of work and workers change with the change in the season. ... Such as agricultural industry wherein the demand for workers is more during harvesting than is required in other months in a year.

•mint parity

the mint parity theory states that under gold standard, the exchange rate tends to stay close to the ratio of gold values or the mint parity or par. In other words, the rate of exchange between the gold standard countries is determined by the goldequivalents of the concerned currencies.

Neoclassical approach to economics

the most dominate methodology used to examine questions in economics The market is the central feature of this approach and assumes decisions are based on rationality and self-interest

MPL

the slope of the production function equals the marginal product of labor (MPL) as more labor is added, the marginal product of labor declines -more labor into system, productivity declines rises at a diminishing rate

Gross National Income

the total amount of money earned by a nations people and businesses. It is used to measure and track a nation's wealth from year to year. The number includes the nations GDP plus income it receives from overseas sources. •Given the emergence of "Leprechaun Economics", Irish Central Bank Governor Prof. Philip Lane suggested GNI be used as a measure of Irish economic activity. •Prof. Lane is on record as saying ""Everyone around the world recognises that the interpretation of national account data in a globalised economy presents challenges. Ireland happens to be at the front end of that because of the sheer scale of the multinational sector". •For Ireland today GNI provides a much better picture of the size of the economy and controls for depreciation of foreign-owned domestic capital and the retained earnings of domiciled firms. the total domestic and foreign output claimed by residents of a country, consisting of gross domestic product, plus factor incomes earned by foreign residents, minus income earned in the domestic economy by nonresidents similar to GNP sum value of output by resident producers + net receipts of primary income from abroad + any product taxes (less subsidies) not included in the valuation of output a country with earns positive net income on foreign direct investment (FDI) will include in GNI but not GDP

frictional unemployment

the unemployment which exists in any economy due to people being in the process of moving from one job to another.

structural unemployment

unemployment resulting from industrial reorganization, typically due to technological change, rather than fluctuations in supply or demand.

blockchain

what underlines bitcoin, generate #, must be used for transaction •The currency uses a peer-to-peer exchange mechanisms that rely upon a "Blockchain" to record and complete transactions. •The Blockchain is a public ledger were all bitcoin in accounts is publicly recorded.

Cyclical Unemployment

when the overall demand for goods and services in an economy cannot support full employment. It occurs during periods of slow economic growth or during periods of economic contraction

Expansionary Policy

•A decrease in taxes e.g. reduction in VAT, PAYE or Corporation Tax. •An increase in expenditure e.g. greater Capital Investment in the Budget •A reduction in interest rates e.g. European Central Bank cuts lending rates. •An increase in the money supply e.g. more currency is printed and put into circulation.

Contractionary Policy

•A increase in taxes e.g. increases in VAT, PAYE or Corporation Tax. •An decrease in expenditure e.g. reduction Capital Investment in the Budget. •An increase in interest rates e.g. European Central Bank increases lending rates. •An decrease in the money supply e.g. currency taken out of circulation.

Measuring Inflation: CPI

•A more commonly used measure of inflation is the Consumer Price Index (CPI). •The CPI turns the prices of a basket of goods and services into a single index measuring the overall level of prices, relative to the price of the same basket in a base year. -limited by goods and shops

recession

•A recession has a technical definition and is characterised as two successive quarters of negative growth.

Major Sporting Events and Crowding Out

•A working paper by Victor Matheson and Robert Baade sums this up nicely when they say: "Event tourists may simply supplant other travelers who would normally visit the host venues. A competition that attracts one million sports visitors while displacing an equal number of regular visitors is huge event in by gross measures even though the net impact of the event is negligible. A typical survey approach to measuring economic impact will identify a large number of visitors to a mega-event, but will fail to identify those regular visitors who are displaced. A fundamental shortcoming of economic impact studies pertains, therefore, not to information on spending for those who are included in a direct expenditure survey, but rather with the lack of information on the spending behaviour for those who are not".

Losses from EMU

•Again, we focus on the economic losses of being part of EMU. There are obvious political losses, which issues such as Brexit have indirectly brought into sharp focus. • •Tinbergen (1952) demonstrated that to achieve internal and external balance simultaneously, an equal number of targets and instruments were needed, including autonomy over exchange rate policy. • •Other notable academic contributions to the literature from Fleming (1971) and Cordon (1972) argues that if countries deprive themselves of exchange rates as policy instruments, they impose on themselves losses that are essentially emanating form enforced departure from internal balance, both internally and externally. -IE can't devalue, bad if trade deficit (lucky)

The Aggregate Demand Curve

•Aggregate Demand is the relationship between the quantity of output demanded (Y) and the aggregate price level (P). • •The aggregate demand curve is determined by consumption, investment, government expenditure and traded goods. Keynesian's believe it is here that the solution to recessions and booms lies.

Business Cycle Models

•Attempts to understand how business cycles occur have led to models which differ in assumptions that are made. These can be broken into two distinct groups: 1.Models that assume markets clear quickly, welfare of households and firms is maximised and no reason for economic actors to change behaviour. (Classical Economists/Austrian School: 1776/1883 - to present). ● 2.Models that assume markets don't clear quickly and that rigidities are present, particularly with regards to prices and wages. This means for a period of time households and firms will not maximise welfare. (Keynesians: 1929 - to present).

Regulating the Currency

•Authorities in China and South Korea are now making moves to regulate the currency more tightly. This is probably not good news for investors in the currency. (more difficult to make transactions) •In April 2019, President Vladimir Putin of Russia instructed his government to adopt federal laws which can regulate the use of cryptocurrency. These were required by July 2019, and are a consequence of Russia's decision to broadened its definition of "digital financial assets" to include cryptocurrencies such as Bitcoin. (could potentially undermine russian currency) •However, the biggest challenge facing the currency if the past few months are anything to go by, is its unpredictability. Money and currencies need stability. Bitcoin is proving to be anything but and behaves more like a stock or share. (must be stable to survive in long term)

What Is Bitcoin

•Bitcoin () is a decentralized digital currency, or cryptocurrency, that operates without a central bank or single administrator. (no central bank or guiding authority) •The currency can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. •Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain.

Bitcoin's Value - Inception to Today

•By September 2017, the electronic currency was worth more than $4,000. •It surpassed $10,000 in October of that year and eventually reached it's peak in mid-December 2017 - $19,167. •It is yet to surpass this value •Following this high, a sell-off began. By mid-January 2018, Bitcoin had lost almost half its value. •However, a recovery started in late 2018 and continued into 2019. As of the today (4th of March at 12 noon) one bitcoin is worth almost $8,721.

Commodity money

•Commodity money is money which does have an intrinsic value and was most commonly used in the past. Historical examples are widespread, the most important and frequent being gold.

Counter-cyclical

•Counter-cyclical policy attempts to break from the current position of the business cycles.

How Does the Consumer Price Index Work?

•Each month the Central Statistics Office (CSO) and Eurostat compute the price of a list of goods and report the CPI. •The goods selected in this fixed basket are those deemed most important to consumers and include many everyday items. •The table to the right lists the twelve categories used by the CSO to calculate Irish inflation. •House prices are not included in the index. The purchase of a house is considered to be an investment rather than consumer expenditure and is generally financed with a mortgage. Mortgage interest repayments are included in the CPI but not the mortgage capital repayments. •Other items that are excluded from the CPI are charity donations, betting payments, life assurance policies, pension contributions, etc. These items either have no price or cannot be priced. •It is important to note that the CPI is a price index and not a cost of living index. It cannot measure changes in households' real disposable income and consumption patterns.

The Frequency of Economic Shocks

•Economic shocks have occurred since trade and banking started to emerge. One can trace these as far back as the Roman Empire. • •In more modern times, one can probably start with the Great Depression of 1929 and work forward. From there, the following are of note: 1. 1973 oil crisis (caused by yom kippur war) 2. 1979 energy crisis (cause by iranian revolution) 3. 1987 black monday (caused by asset price bubble) 4. early 1990s finnish/swedish banking crisis (caused by house price bubble) 5. 1997 asian financial crisis (caused by collapse of the thai baht) 6. 2007-2013 great recession (caused by subprime mortgage crisis)

Markets Won't Clear as Prices are Sticky...

•Economists that follow this doctrine generally believe the following logic to hold following an economic shock: 1.Output falls and the economy moves into recession with a gap emerging between potential output and actually output. 2.Prices are sticky. The invisible hand cannot return the economy to its original equilibrium and the market cannot clear. 3.The government's approach should be to intervene in the economy and stimulate aggregate demand. 4.A return to the original equilibrium is reached, with the result being a no change to the original price level and output back to its original level. big graph paper

Markets Will Clear...

•Economists that follow this doctrine generally believe the following logic will hold following an economic shock: 1.Output falls and the economy moves into recession with a gap emerging between potential output and actually output. 2.The government's approach should be to remain inactive as the invisible hand will intervene and regulate the market. 3.Prices start to fall and the economy adjusts. 4.A new equilibrium is reached with the result being a lower price level and output back to its original level. big graph paper

Completing EMU...

•Enlargement of EMU has brought with it a greater calls for fiscal coordination. (Taxation and Government spending) •It this were to happen, greater control over the Stability and Growth Pact is required, particularly if Eastern bloc countries are to be fully integrated. •At this point in time, there appears to be little appetite for this. •However, expansion of the single currency to other member states is likely to continue in the years ahead

GDP and GDP per Capita

•GDP is the cumulative value of all output, income of expenditure. •GDP per capita is the value divided by the population, and is often used as a measure of living standards. •The trends in GDP or GDP per capita are upwards hence its mean value is non-stationary, or rising over time.

Could Bitcoin Undermine the Economic System?

•Given that the number of bitcoin is limited to 21 million, it is estimated that all available units will be mined by 2140. •Bitcoin had a market value of approximately $156 billion. This had been $200 billion in late 2017. •The narrow money supply in the US (M1) contains about $1.2 trillion. A broader money supply (M2) brings this to more than $10 trillion. This means bitcoin makes about 1.5% of M2. •tiny fraction of money supply-if it crashed it would have no effect non linear relationship of being mined

Managing the Economy 5.2

•Governments can decide to pursue expansionary or contractionary policies in order to grow or cool the economy. As mentioned previously, this is achieved through the use of both fiscal and monetary policy. • •The problem that most countries face is that expansionary policies are politically popular and contractionary are not, despite sometimes being in the best interest of the long run health of the economy. • •This results in an ongoing tension between the business cycle and the political business cycle. •

The Logic Behind the Multiplier

•How does the multiplier work? The basic logic is as follows, using a fiscal multiplier example: -The government increase spending in the economy by €100 million. - -This leads to job creation and higher levels of income for people currently employed. - -Consumer spending rises, and firms producing consumer goods hire more people. •"We do nothing because we have not the money. But it is precisely because we do not do anything that we have not the money" -Higher profits are reported, leading to further increases in income and consumer spending - -A positive feedback loop is created as higher demand leads to higher income, which in turn leads to even higher demand. - -Once added together, the total impact on the economy is much greater than the €100 million originally spent by the government. • ex. FDR New Deal From 1933 to 1935 the Public Works Administration (PWA) in the US spent $3.3 billion with private companies to build 34,599 projects.

Cryptocurrency and The Austrian View

•If he were alive today, it is highly likely Fredrich Hayek would advocate the use of bitcoin. •Hayek's book Denationalisation of Money: The Argument Refined advocates a complete free market in the production, distribution and management of money to end the monopoly of central banks •In 1978 Hayek published a revised and enlarged edition •The decentralization of money, away from an institution like the European Central Bank (ECB), offered by bitcoin has its theoretical roots in the Austrian school of economics.

Crowding Out

•If the government spends money in the economy, prices naturally rise (price of goods and services, houses, money (interest rate), etc.). This naturally reduces private spending and investment and is known as crowding out. • •For an example of this we can consider the 2011 Rugby World Cup held in New Zealand. • •Just over 242,500 visitors arrived during the months September and October, when the 2011 tournament was on. Did the tournament attract and extra quarter of a million people to New Zealand? • •Of course not. The impact of crowding out can actually be measured.

Establishing a Single Currency

•In 1989, President of the European Commission Jacques Delors, outlined three stages in the process of creating EMU. This became known as the Delors Report. •The three stages for the implementation were : -Stage 1 - 1st of July 1990 to 31st of December 1993 (Treaty of Maastricht). -Stage 2 - 1st of January 1994 to 31st of December 1998 (End of national currencies). -Stage 3 - 1st of January 1999 and on-going. •In order for this to happen, at least 7 Members States had to pass strict economic criteria, required for the successful operation of the single currency. Prime Minister of Luxembourg Pierre Werner credited with starting the process of EMU in the early 1970s.

Disequilibrium

•In the short-run, the real indicators of output and employment move away from their natural level.

Economic Shocks and Aggregate Demand/Supply

•In the short-run, the real indicators of output and employment move away from their natural level. •In order to fix this, government use stabilisation policy to reduce the severity of short-run economic fluctuations. •Effective stabilisation policy needs to be countercyclical in order to return the economy to an equilibrium level of output.

what is inflation?

•Inflation is an increase in the general price level over a period of time. •Through time prices have increased, however this trend has been punctuated by short periods where prices decrease. A negative rate of inflation is called deflation and occurs when the inflation rate is less than 0% or negative.

Hyperinflation

•Inflation that exceeds 50% per month is known as hyperinflation. This leads to a dramatic escalation in the associated costs that we listed.

•It is estimated, between 3 and 6 million people use the cryptocurrency today. People can acquire bitcoin in two main ways.

•It is estimated, between 3 and 6 million people use the cryptocurrency today. People can acquire bitcoin in two main ways. 1.It can be purchased through a broker. 2.It can be mined by completing mathematical problems that form part of the Blockchain. •Users of the digital currency complete transactions using a private key (known only to them) and a corresponding digital signature unique to each transaction. •This process fulfils two functions. Firstly, it ensures the same bitcoin is not spent multiple times, and secondly, it ensures that the public ledger (Blockchain) is consist and complete.

Defining the Short & Long Run...

•Keynes was one of the first economists to recognize the idea that in the short-run prices may be "sticky" at some predetermined level. Prices are generally observed to be sticky downward. • •This idea was an odds with Adam Smith's acclaimed "invisible hand" theory as to how the free market regulates itself and kept on a steady course. • •To this day, the debate continues as to whether or not governments should interfere in the working of the economy, and to what extent.

The Money Stock

•Measuring the supply of money, or money stock as it is also known, in the economy is not an easy task. This has given rise to the definitions M1, M2 and M3. •Currency is the most obvious asset to include in the money stock, yet this is not the only asset that can be used as a medium of exchange. In our modern economy the use of credit and debit cards is becoming widespread. Neither of these are money itself, but rather a means of transferring money and defer payment. •debit: transfer-your account to someone else's and credit is IOU, defer payment, normally 30 days

Medium of Exchange

•Medium of exchange: Money is what is used to buy goods and services. In this sense we normally mean cash, debit and credit cards and cheques. However, this has expanded in recent times to include cryptocurrencies. •One can be confident that money will be accepted in exchange for goods and services. •Money makes indirect purchases possible as a double coincidence of wants is not necessary.

The Functions of the Central Bank

•Most Central Banks have two main functions: 1.Macroeconomic stability - To maintain stable growth in the economy and stable prices, avoiding excessive and damaging swings in economic activity. 2.Financial system stability - To maintain the functioning of a stable financial system, including acting as a lender of last resort. (if commercial bank gets in trouble) •The first function is achieved by increasing or decreasing the money supply. The actions taken to manage the money supply are known as monetary policy. •As we have said already, the buying and selling over government bonds, known as open market operations, is one tool the central bank can use to manage the money supply. (gov't/bank can sell or buy bonds

Trend Growth Rates

•Most of the data we will talk about is classed as time-series data. These are observations, over a period of time, ordered by time. Cumulative growth trends upwards. • •Short-run fluctuations can only be seen by focusing on annually changes in growth. This is the business cycle. • •These two illustrations show that while Ireland has grown considerably since 1970, the recent experience has been bumpy

The "Money Shock" in Ireland

•On the on 13th of February 1980 Ireland got its first Automatic Teller Machine (ATM) at a Bank of Ireland branch in Stillorgan, Co Dublin. • •What impact did this have on the supply of money? •(accessing money outside banking hours=positive shock) •The impact is very similar to the rapid increases in the number of credit cards in Ireland during the 1990s and 2000s. •(credit surge)

The Three Elements of Monetary Integration

•Once these were achieved member states had effectively realised monetary integration. This is because in practice, States had attained the three elements necessary for this to occur. • •The three are: 1. a common monetary policy 2. a common pool of foreign exchange reserve and a common exchange rate 3. a single central bank or monetary authority to operate these policies •This approach is fundamentally different to fixed peg system e.g. Bretton Woods, as no one country had monetary autonomy. -burn the boats-can't leave new world -tie to mast (commitment mechanism)

The Multiplier Effect

•One of Keynes' most famous concepts is that of the multiplier effect. This is the additional increase in aggregate demand that results when an expansionary policy (either fiscal or monetary) increase income, thereby increasing consumer spending. ••The money multiplier measures how much the money supply increases in response to a change in the monetary base. •The fiscal multiplier measures how an change in expenditure of taxes impact upon aggregate demand.

What is Money?

•One of the key requirement of the capitalist system is the use of money as a means to exchange goods and services. In The Economic Consequences of the Peace in 1919, Keynes wrote "Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency". •Today money exists in paper, metal, and increasingly, electronic form. None of these have an intrinsic value but their use is based on trust. •This form of exchange is extremely useful in the complex modern societies we live in.

Opportunity Cost

•Opportunity cost is what you give up to get something else. Making decisions involves comparing the costs and benefits of alternative courses of action. • •This can be very difficult however as some costs are not obvious and some benefits only become apparent after a long period of time. • •The government committed €320 million to the Rugby World Cup 2023 Act 2017. This was at a time when there was a housing crisis, record levels of homelessness and large waiting times in our hospitals, both in emergency departments and long-term public waiting lists. • •As Milton Friedman once said "There is no such thing as a free lunch".

PoW systems

•PoW systems prevent denial-of-service attacks and issues such as spam on a network by requiring work from the user.-asymmetry (prevent people from spending your bitcoin and prevents spam attacks) •A key feature of PoW is their asymmetry: the work must be moderately hard (yet feasible) but easy to check for the service provider.

The Austrian Perspective

•The "True" Austrian definition of money supply, put forward by Ludwig von Mises in his Theory of Money and Credit (1953) was that it included all money plus money substitutes. ex. art (if valuable) •Money, he defined, as all notes and coins in circulation. Money substitutes he suggested included all assets perfectly secure and immediately convertible to money. •If a person gives up a claim to money in the present, for some promise of money in the future, the asset they hold may not be considered part of the money supply.

The ECB and Price Stability

•Price stability is one of the cornerstones of the ECB. The Governing Council decides how to achieve this based on the official definition of bank monetary policy strategy which states: "...in the pursuit of price stability, it aims to maintain inflation rates below but close to 2 per cent over the medium term." •The independence of the ECB allows it to achieve this aim. Other countries in the world are often not so lucky. This can be largely explained by historical accident. 1. Wim Duisenberg(1998-2003)-Dutch-Previously Minister of Finance 2. Jean-Claude Trichet (2003-2011)-French-forced IE into bailout, unpopular in IE 3. Mario Draghi (2011-2019)-Italy-Previously a managing director of Goldman Sachs, executive director of the World Bank, Chairman of the Financial Stability Board and Governor of the Banca d'Italia. 4. Christine Lagarde (2019- )-French-Previously Minister of Economy, Finance and Industry of France and Managing Director of the International Monetary Fund.-head of IMF when IE was in crisis

What's the Difference? CPI vs GDP Deflator

•Prices of capital goods -Included in GDP deflator -Excluded from CPI •Prices of imported consumer goods -Included in CPI -Excluded from GDP deflator •The basket of goods: -CPI: fixed -GDP deflator: changes every year ~CPI better because more refined level

barter system

•Prior to the emergence of the capitalist system people relied on a bartersystem. This system is highly inefficient as it requires a double-coincidence of wants. Money has overcome this problem. -inefficient -overcome by gold

The Multiplier and the Rugby World Cup

•Prior to the vote to decide the 2023 host country in November 2017, it had been suggested that the potential economic impact that the Rugby World Cup (RWC) may have on Ireland, could be worth more than €1 billion. • •It was claimed that the tournament would attract 450,000 international visitors. The logic that followed was that the tournament was going to make the incomes of people living here rise during late 2023. • •However, the Irish State would needed to have seen a return at least €320 million before any multiplier could be counted. •

Pro-cyclical

•Pro-cyclical policy reinforces the current position of the business cycles.

Real Business Cycles

•Real business-cycle theory advances the New Classical School and assumes fluctuations, are to a large extent, caused by real (in contrast to nominal) shocks. It sees business cycle fluctuations as an efficient response to exogenous changes in the real economic environment. • •The model is driven by large and sudden changes in available production technology and rejects Keynesian assumptions, arguing instead that governments should not intervene through discretionary fiscal or monetary policy designed to actively smooth out economic short-term fluctuations. • •In 2004 Finn E. Kydland and Edward C. Prescott won the Nobel Prize for Economics based on work they had done in this area.

What Does Ireland Tend to Do?

•Since the foundation of the State in the early 1920s, Irish governments have adopted both expansionary and contractionary polices. • •One could argue that Irish government policy regarding taxation, spending, interest rate setting and money supply have been influenced by Keynesian thinking. • •However, there is one big difference with what successive Irish governments have done and Keynesian Economics... •

Store of Value

•Store of Value: Money is a way of transferring purchasing power from the present to the future. •If an individual works today and receives €80 for his or her work, they can hold the money and spend it today, tomorrow, next week or next year. •It is however, an imperfect store of value as inflation erodes its purchasing power. ex. picture of man in germany using a wheelbarrow to hold the money needed to buy bread

The Evolution of Money

•Technically defined, money is the set of assets in an economy that people regularly use to buy goods and services, cash being the most common form of money. •Over the centuries money has evolved from what is called commodity money, prevalent under the barter system, to the now commonplace existence of fiat money. gold bars> gold coins>note redeemable for gold (paper)> paper (no gold)

The "Money Shock" in Ireland: ATM

•The first example (ATM) is primarily a positive supply-side shock while the second (credit cards) is primarily a positive demand-side shock. • •Both effectively raised money supply in circulation, thus shifting the aggregate supply and demand curves to the right. • •An increase to the right is an indictor of increased output, expenditure or income (remember the Circular Flow of Income Model). •graph 6.1 demand increase>supply increases>inflation> higher demand

Crash of 1929

•The Crash of 1929 changed everything that we thought we knew about economics. Unemployment soared and living standards, in even the richest countries, began to decline. • •The reason the depression of the 1930s was different to anything ever experienced is due to that fact that markets, particularly the labour market, didn't clear. • •Keynes' provided a different assessment of the economy. He argued the difference between the short and the long run could be delineated by the behaviour of prices. •

The European Central Bank (ECB)

•The ECB was founded on the 1st of June 1998 when a group of European Union countries decided to form the European Monetary Union (EMU). (Great Britain, sweden, denmark, and poland never joined) Originally, 11 countries adopted the currency. This has grown to include 19 states today. •The currency was launched in electronic form on the 1st of January 1999, and in fiat form at the start of 2002. •The Governing Council of the ECB meets twice a month in Frankfurt and sets the main ECB interest rate, the refinancing rate. (all secrecy only outcome shared-togetherness)

Measuring Inflation: GDP Deflator

•The GDP Deflator, also called the implicit price deflator for GDP, measures the price of output relative to its price in the base year. It reflects what's happening to the overall level of prices in the economy. nominal GDP/real GDP

The Fiscal Advisory Council

•The Irish Fiscal Advisory Council (IFAC) is an independent statutory body whose purpose is to provide an independent assessment of official budgetary forecasts and proposed fiscal policy objectives. • •The Council was established on an interim basis in July 2011 and put on a statutory footing in December 2012 by the Fiscal Responsibility Act. • Fiscal Advisory Council mandate summarized: independent economic analysis: -assess official forecasts, endorse macro economic forecasts, assess compliance with rules, assess fiscal stance

The Birth of the Business Cycles

•The aim of most policymakers is to increase National Income in a country. Even though there is an increasing amount of understanding of the nature of our economy, this still remains one of the biggest challenges for governments and policymakers.

The Role of the Central Bank

•The central bank in any economic system is there to regulate the quantity of money available in the economy.

Strict Economic Criteria for the Single Currency

•The criteria were as follows... 1.Price Stability - A stable and average inflation rate not exceeding 1.5% of the best three performing member states. (national level, no inflation-currency becomes different) 2.Interest Rates - Membership required that an average nominal long-term interest rate that does not exceed more than 2%. (measure of risk, make everyone roughly as safe and risky) 3.Budget Deficits - Achieving a government budgetary position without a deficit that is excessive (Maximum annual deficit at 3% of GDP). 4.Public Debt - The ratio of government debt should not exceed 60% of GDP. (every euro made couldn't ow more than 60 pence)-growth and stability pack 5.Currency Stability - Membership required that a country shall not devalue its currency's bilateral central rate against other Member States. (can't devalue goods)

How Effective is the Multiplier?

•The effectiveness of the multiplier depends on the fraction of additional income that consumers are willing to spend. • •This is called the marginal propensity to consume and is much higher at lower levels of absolute income. • •The simple formula for calculating the multiplier is: multiplier= 1/(1-MPC*) MPC*=MPC (1-t) • Where: MPC measures the marginal propensity to consume. t measures the tax rate. •Let's consider another example...

Gains From EMU

•The gains from EMU could be economic or political, or both. Some of the political benefits are obvious e.g. possibility of deeper integration, security benefits, etc. •The economic benefits can be summarises as follows... 1.A common pool of foreign exchange reserves is efficient, increasing trade between members, at the expense of the rest of the world. (put money together=increase trade, made insiders and outsiders) 2.As it is unlikely member states will simultaneously go into deficit, hence one member's surplus can offset another member's deficit. (IE, Greece, Cyprus not doing well>bailed out) 3.The euro is now a major world medium of exchange, which competes with the US dollar or Yen. This means greater stability in international currency markets, and greater currencies security for EU member states, particularly smaller Eurozone countries. (Strong, stable, euro complete with dollar) --low currency risk, encourages more cross border trade, stimulate inward investment, increases price transparency which helps consumers to find better prices (competition), and transactions (labor mobility)

The Gold Standard

•The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold. (very safe, no speculation) •Under this, currency issuers guarantee to redeem notes, upon demand, in that amount of gold. Governments employing such a fixed unit of account shared a fixed-currency relationship. (stability but inflexible, what if there was a crisis) •This system lasted from 1880 until 1914. Attempts were made to re-establish it after World War I however these failed due to the Great Depression. -wizard of oz

Competition Policy in the EU

•The main purpose of competition policy is protecting markets from breaking down. It does this by promoting competitive market structures and policing anti-competitive behaviour, therefore promoting efficiency and protecting consumer welfare.

% Change in GDP

•The percentage change in GDP, usually considered annually, is the difference in output, income of expenditure year to year. •This can rise (economy growing) or fall (economy in recession). This is what causes the business cycle. •The trend in this value should be constant as the mean value is stationary, neither rising nor falling, over time.

Controlling the Quantity Money

•The quantity of money in the economy is know as the money supply and in Ireland is controlled by the European Central Bank (ECB). •The primary way this is done is through the purchase/sale of government bonds. Buying bonds increases the money supply, while selling bonds decreases the supply of money in the economy. •Evaluating the quantity of money in the economy is difficult due to the different assets are used for transactions, e.g. cash, cheques, etc. This ambiguity leads to numerous measures of the quantity of money called M1 M2 and M3. M1 includes money in circulation plus checkable deposits in banks. M2 includes M1 plus savings deposits (less than $100,000) and money market mutual funds. M3 includes M2 plus large time deposits in banks.

Interest Rates & Inflation

•The rate of inflation is important when determining interest rates in the economy. •Recall, the interest rate is simply the price of money. If one borrows money the interest rate is what they must pay for the funds. If one saves their money in a financial institution the interest rate is what they receive in return for investing their funds. •Borrowers and lenders need to pay close attention to the nominal interest rate and the real interest rate. •The nominal rate is the amount financial institutions pay investors. The real interest rate is the nominal interest rate adjusted for inflation. graph 8.2

Hal Finney

•The receiver of the first bitcoin transaction was Hal Finney. On the 12th of January 2009 he received ten bitcoins from Nakamoto. •Why Finney? In 2004, Finney had created the first reusable proof of work (PoW) system.

What Causes Business Cycles?

•There are a variety of possible explanations for business cycles. For example, at least five different causes are put forward for the Celtic Tiger in Ireland from 1994 to 2007. As many, if not more, explanations are offered for the Irish Financial Crisis from August 2008 to 2013. • •Generally, the following are considered to be the main causes of the business cycle: 1. household spending decisions (consumption) 2. firm decision making-are firms investing? 3. external shocks-9/11 caused recession in us 4. gov't policy-IE taxes in recessions (not good) 5. confidence and expectations (rationale) 6. life cycles of government-promise new spending and tax cuts for election

Soft Paternalism

•Today, Ireland has around 3,250 ATM machines. Cork city alone has about 40. However, this number was higher in 2008. • •A growing body of literature has been developed on the idea of soft paternalism. Soft paternalism is a combination of two ideas; libertarianism and paternalism. • •In 2008 Richard Thaler and Cass Sunstein both co-authored the book Nudge. The book is probably the most widely cited work in this area. • paternalism: guide protect>nudge libertarianism: people know best

How Did The Gold Standard Work?

•Under the gold standard each country defined the gold content of its currency and stood ready to buy or sell any amount of gold at that price. Since the gold content of each unit was fixed so was the exchange rate. •A £1 gold coin in the UK contained 113 grains of pure gold, while $1 gold coin contained 23.22 grains. Hence the exchange rate was £1/$4.87. •This exchange rate was known as mint parity. •The cost of shipping a gold coin across the Atlantic was about three cents. Therefore, the exchange rate could never fluctuate above £1/$4.90 (gold export point) or below £1/$4.84 (gold import point).

Unit of Account

•Unit of account: Money provides terms in which prices are quoted and debts are recorded. •Commodities are priced using monetary amounts, hence a television may cost €800 not 2 bars of gold or 4000 bags of salt. •Money is the yardstick with which we measure economic transactions. This is critical in order to understand the relative value of different commodities.

New Zealand Arrivals....

•We know 242,736 people visited New Zealand in September and October 2011. During these two months, visitors arrived were asked to complete a from stating the purpose of their visit. One listed purpose was "Rugby World Cup. 127,600 chose this as their reason for visiting. This means approximately 1 in every 2 visitors was their for the rugby tournament. not 242,500 actually 127,600 must look at net increase •The total number (242,736) and those visiting for the tournament (127,600) are not too important • •Rather, what matters, is the net increase in tourist arrivals. • •Looking at 2010 and 2012 we can see this is between 18,000 to 23,300 per the month for September and October.

November 2018 IFAC Warning

•What did IFAC tell the current Minster for Finance Pascal Donoghue? "While the short-term outlook for the Irish economy remains strong, a slowdown in coming years is inevitable...A prudent fiscal policy would see net policy spending rise in line with sustainable revenues...Repeated failures to prevent unbudgeted spending increases have left the public finances more exposed to adverse shocks." In October 2019 IFAC said: "The Council has repeatedly criticised the Government's medium- term plans for not being credible. This is due to its forecasts relying on...implausibly low spending growth in later years, a lack of a medium-term anchor for net spending increases, a poorly developed debt ratio target, and no clear plan to set aside excess corporation tax receipts."

Prices in the Short and Long Run

•What is important to note is that different commodities have varying short and long run cycles. The length of each depends on the conditions that exist in the market place for each particular good. • •In the long run, all prices are flexible and can response to changes in supply and demand. Output is fixed by capital, labour and technology. Regardless of what price consumers are willing to pay supply is fixed. •

The Future of Bitcoin...

•When one considers all currency in the financial system it becomes obvious that Bitcoin makes up only a tiny share of this. •Given this, and the current market value of the currency, it is very unlikely that it could undermine the global financial system on its own. •The instability of the currency in recent times means it will probably never replace traditional fiat currency as the primary way to purchase goods and services. -similar to oil, too unstable, don't want fluctuations with currency/not enough faith

Breaking the Cycle...

•Whether an expansionary or a contractionary policy, successive governments (regardless of political persuasion) have introduced pro-cyclical policies. • •Keynesian economists would probably prefer counter-cyclical policies. • •How can we break this cycle of economic mismanagement? "Analysts predict that in the event of no deal, sterling could fall by 20%. Is this such a bad thing? Our goods will become 20% more competitive on the global market and our EU competitors' goods would be less competitive".-Former Brexit Secretary David Davis

The Eurozone Countries

•While 19 countries are in the Eurozone (originally 11), a further 4 states use the euro with a monetary agreement. •Two European countries even use the euro unilaterally! (no permission-can't print) •It is difficult to imagine a scenario today, where it would be in Ireland's long-term economic interest to leave the Eurozone (small island economy)

The Birth of Bitcoin

•While Bitcoin has it's origins in 2008, it was first "mined" by Satoshi Nakamoto on the 3rd of January 2009. (digital stamp) •Between then and now the cryptocurrency has increased in value from $0.06 to a maximum of $19,343 on the 16th of December 2017. •Bitcoin's rise was not instant. From it's inception in 2009 to late 2013 it was worth less than $1,000. Upon reaching this valuation, little changed until January 2017 when a rapid increase in price started to occur.

Problems with the Multiplier

•Whilst widely cited due to its parsimonious nature and wide appeal, the multiplier effect is probably one of the most misused concepts in all of economics. • •The multiplier, and advocates of such an approach, often drastically overstate the effect initial spending has on the economy and fail to account for two consequences of increased spending: 1. opportunity cost 2. crowding out (when government spends money and stifles progress •Again, let's consider an example.

Fiat money

•money which has no intrinsic value, for example a €10 note or a $1 bill. Fiat money is general accepted as the norm in most economic systems today. •When fiat (paper) money was redeemable for gold a country was said to be on a gold standard. This scenario was common throughout the late 19th century .

Child Benefit in Ireland

•payable to the parents or guardians of children under 16 years of age, or under 18 years of age if the child is not in full-time employment. • •All parents are entitled to €140 per month, per child, with the transfer not subject to any means testing. • •A debate often occurs as to whether this should be the case, with judgements and values critical to one's views on the matter.

Fiscal contractions

•tend to cause a trade surplus