MACROECONOMICS FINAL

Be clear on what we are referring to when we talk about "The Fed." Who are the main decision makers at the Fed?

"The Fed" is the Federal Reserve. The Federal Open Market Committee and Janet Yellen is the head of this committee. This committee decides the federal funds rate. The Fed consists of an office in D.C. and there are 12 regional banks in the US. The main decision makers are the open market committee; it's a 12-person committee with a chair. There are 7 governs appointed by president with 14 year terms and 5 presidents of the 12 regional banks that rotate. The chair has no more voting power than the rest of the committee but they are the face of "The Fed", speaks to the press, etc.

Be very clear on key categorical distinctions/definitions. Understanding them is not a matter of mere word games, but of understanding the issues at hand. The key definitions to know are: *Deficits vs. accumulated debt *Cyclical vs. structural deficits

*Deficit (money taken in) is how much you borrow every year, the deficit is 10% of GDP. It happens when expenses exceed revenues, imports exceed exports, or liabilities exceed assets. A deficit is synonymous with a shortfall or loss and is the opposite of a surplus. *debt (money owed) is how much debt you accumulate after borrowing year after year (accumulation of years of deficit), the debt is %60 of GDP. The other important thing is how much interest we pay. This is the most urgent number, because this is what we have to pay immediately. *Structural deficit occurs when a country (or state, municipality, etc) posts a deficit even when the economy is operating at its full potential: is accrued over the course of full business cycle. Building public sector projects is one of the contributing factors to structural deficit. The amount by which a government's spending is more than it receives in taxes in a particular period, whether the economy is performing well or not. *Cyclical deficit only occurs when an economy is not performing to its full potential (for example, if an economy is currently struggling through a recession): is explicitly tied to economic downturn. It is the amount by which a government's spending is more than it receives in taxes at a time when the economy is not performing well. Y=C+I+G+(X-M). In a recession C,I go down. To make sure Y doesn't go down much, G has to go up. In order to increase government spending, the government has to borrow money. Another way is to increase X, but this is unlikely to happen in a recession, because other countries are likely to be on recession as well.

The main justification for cyclical deficits comes from the "functional finance" approach. The overall approach here is not to think of government deficits as necessarily either good or bad, but to ask the question: What function are the deficits serving? Are the deficits being put to good use?

*consider national income identity: Y=C+I+G+(X-M) -consumption (C) depends on national income (Y) - private investment (I) is volatile ~can fluctuate with financial market volatility *if economy moving into recession, only two possible ways to break downward vicious cycle - more government spending (G) - more net exports (X-M) *functional finance says pump up G to fight recession Some say government deficits are evil. We should have a law that says government aren't allowed to run deficit (sound finance= income should equal spending). This is the exact opposite of functional finance (focused on growth instead of wealth). For example, when we increase gov. spending when we have recession our deficit has a function. Another view against functional finance is Ricardian equivalence which says that government spending has no effect, because tax payers know that as a result of government spending their taxes is at some point going to rise, so they will increase saving and lower spending to offset the future tax increase. Functional finance developed in the 1940s and was a revolutionary concept. Helped government to maintain full employment. When unemployment is going up sharply. The government can borrow money to put more demand in the economy. FDR said the government should not borrow more than they can afford. He didn't understand Functional FInance. He changed his views when he became President. Deficits allow us to stabilize the economy (though it's important we pay the bills when times get better), deficit spending can stimulate investment through crowding in, and there's little danger that the spending will drive up interest rates or be inflationary due to the large amount of slack in the economy. to stimulate an economy during a recession or to foster future growth.

To what extent can we attribute the current rise in inflation to wage increases? What might be some other factors contributing to the current inflation spike?

-inflation rate is 8.5% -wage increases at 4%, have gone up, making 4% more than the average workers and more than last year -the other factors was the rise in energy, among energy cost is at gasoline prices, it gas gone doubled since pre-covid -these rises in energy cost, during the covid lockdown the production of fuel has flunk because the demand has increases as well as supply -the risen power of the company, they keep increasing their prices because the demand is high and increases -supply chain break down during covid, so used car is expensive because of the lack of computer chips -the factors are the rising in prices and wages because of inflation

Two factors have contributed to making this most recent financial bubble and crash bigger than previous ones: 1) rising inequality in the U.S. economy; and 2) Deregulation of U.S. financial markets. How have these factors contributed to the crisis?

1.)Rising inequality gives too much power to the top to support financial speculation and gives too little money to promote broad market demand and business expansion. Secular stagnation, liquidity trap: most rich people save than spend leading to no economic growth, the idea that an economy has slowed down not because of this business cycle but because of structural, permanent problems Inequality contributed by having more money flowing to the rich and less flowing to the poor. The rich have more money to gamble with and less to lose. Inequality contributes to instability because rich people are the ones interested in the latest financial scheme. The more these rich people have money (the more inequality we have), the more they will put money in the speculative market, and this raises speculation and instability. Rising inequality means there is more money flowing to the rich and less to everyone else Inequality puts too much money into the hand of the rich who are willing to gamble on speculative ventures (guesses) : Having more money to go to the rich, they have more money to gamble with Temptation to gamble increases when you have more money Top 1% had about 24% of the GDP The 1% are not investing enough money to create more jobs : Not enough money to the majority who drive market demand and business expansion. Poor investments allowed that would not have been allowed with regulation, bipartisan support. In the great depression the rate fell to 8% Currently the rate is still rising 2.) financial deregulation (the reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry.) is an effort by democrats and republicans to overlook the lessons of the past. Crisis couldn't have happened without deregulation. For example the whole mortgage backed security couldn't have happened. Deregulation of the U.S. financial markets there will more speculation with less regulations. Glass Steeple Act 1999 Clinton got rid of it Regulates the banks Make banks have two separate areas Stocks and real people It allowed speculation (purchase of an asset (a commodity, goods, or real estate) with the hope that it will become more valuable in the near future)on derivatives (contract between two or more parties whose value is based on an agreed-upon underlying financial asset backed by cheap, wantonly-issued mortgages, available to even those with questionable creditworthiness). That permitted banks to engage in hedge fund trading with derivatives. Banks then demanded more mortgages to support the profitable sale of these derivatives.

In 2007 - 09, the U.S. and global economy experienced the most severe financial bubble, collapse, and crisis in 70 years. Be clear on the basic dynamics driving a financial bubble. Why can financial bubbles be self-reinforcing? Why do they collapse?

A bubble is an economic cycle that is characterized by the rapid escalation of market value, particularly in the price of assets. This fast inflation is followed by a quick decrease in value, or a contraction, that is sometimes referred to as a "crash" or a "bubble burst." A bubble is created by a surge in asset prices that is driven by exuberant market behavior Investors see a new opportunity (tulips, the internet) and financial market gives out loans to these investors. These people only want to invest because they see that prices are going up and believe they will continue to go up and they can sell at a higher profit. But what they don't realize is that the more they borrow and invested the higher the price becomes. Eventually the bubble burst because income from assets is not producing enough to cover the debt from the loans. Basic pattern: "Overleveraging" Borrowing too much in pursuit of new profit opportunities ->Creates self-reinforcing bubble ->Crisis begins when bubble bursts. Bundled homes together to make them seemingly more affordable and gave faulty loans that people would not be able to pay back and then many homes went up for foreclosure and banks started to fail because no one was paying their mortgages.Self-reinforcement is a process whereby individuals control their own behavior by rewarding themselves when a certain standard of performance has been attained or surpassed. Similarly financial bubbles continue to grow as long as people believe in them even if they may be faulty they continue to grow until eventually they burst because the gap has caught up with them. Overleveraging (excessive borrowing) in pursuit of perceived high profit opportunities. Bundled up thousands of shitty mortgage loans and then you have a clear understand of the level of risk and that gives you less risk. Self reinforcing because you buy more the price for that thing goes up. Collapse because there was not enough money to pay back the debt. Bubbles are increases of asset prices fueled by nothing but expectations that in the future others will be willing to pay even more. As an example, the recent financial crisis started in 2001 with securitization, when banks started to bundle up all the mortgages and selling them in the form of mortgage backed securities. Bundling supposedly caused a decrease in risk. So banks would be more willing to own mortgages because they are presumably less risky. All of a sudden real estate prices go up because banks are giving out more mortgages, and therefore more money is available in the real estate market. So both debt and house prices go up together. But, once people become unable to pay back their debt, bubble deflates.These bubbles are self-reinforcing, because you believe there is a gigantic profit opportunity, prices go up that make people borrow even more.We can easily stop the bubble by putting a ceiling on how much debt you can bring into the market. But Alan Greenspan refused to do it. People see profit opportunity and utilize it to the max- Perception that there is going to be extraordinary value in these companies and you want to get it on it now- People borrow with the idea that they will make a lot of money to pay it back- Prices of those assets increase and then more people buy them and then prices increase again : self-reinforcing- They burst because people then recognize that the only reason they are increasing is because everyone is investing in them, but they are not actually making any money. Created a financial bundle People thought they were going to make huge profits off of these Everyone thought they were making the right decision so they kept investing 2007 interest rates went up People now cannot afford to pay and then people realized it was about to crash Everyone tries to start selling and then all of the prices drop

While the fiscal deficit over 2009 - 2012 and 2020 - 2021 reached historic highs, government interest payments as a share of GDP remained have remained historically low. How could this be possible? Why did it happened? Why, if at all, is the disparity between the two patterns—high fiscal deficits but low government interest payments—significant?

Because, even if you borrow $80 trillion, when interest rate is close to zero, your interest payment will be close to zero. Right now the return on US treasuries is almost 0.7%. Government debt as a share of GDP went up as well. However government interest payments did not go up. Government was buying at low interest rates. This was possible because the fed kept these interest payments low. The fed kept interests low by creating money. If you make more funds available to the public you keep interest rates low. The Fed lends to the government so the government can spend to stimulate the economy and the government pays interest to the fed. They create money and keep the interest rates low. This happened so the government could practice functional finance and not have to pay high interest rates.

*In December 2017, the U.S. Congress passed and President Trump signed into law a major tax-cutting measure. Opinions range as to the impact this new tax structure is likely to have on the U.S. economy. Consider at least one perspective as to what the impacts are likely to be. Will it lead to increased federal deficits and debt? If it leads to increased deficits, will those be cyclical or structural deficit increases? Will there be any broader impacts on the economy?

During the 2017 tax cuts enacted under President Trump, there was no recession at that time. So the deficit increased because the president and congress were inactive, being attacked without having expenditures to an equivalent degree. So basically when you cut the tax, you have got government revenue and when you don't don't cut government spending, the deficit will increase. That is a structural deficit. This is because it is independent of any effort to macroeconomic policy. It's a deficit, so the impacts are going to be on distribution. It will contribute towards increasing the equivalent because you saw who got the biggest tax benefits. Top 5% got $50,000 in tax cuts, the bottom 20% got $400 in tax cuts. So if you want to cut taxes especially on the rich, you don't want to sustain the structural deficit. Over time you are going to cut one of the 3 programs : military, pension, and healthcare. Yes, there would be a broader impact (just look at 2019 when it reflected through covid).

*The Financial Times reported on 5/3/22 that the "Fed reaches for its 'hatchet" to attack galloping inflation." What is the Financial Times referring to as "the hatchet?" When, and to what extent, has "the hatchet" been deployed in the past by the Fed?

Hatchet: The Fed and its monetary policy tools - raising and lowering interest rates and printing money. rise in federal fund rate, trying to raise longer raises ex: mortgage, loans for businesses

Be sure to understand the role of exchange rate issues with respect to China and the US, and more generally. How does having a "cheap" currency help a country export? How could China continue to help keep its currency value low?

If the value of your currency is low relative to dollar, it takes fewer dollars to buy the goods produced in your country. So it would mean that it would be real cheap for US to buy the goods produced in your country. China keeps the value of its currency low to keep up its exports to the US and the rest of the world. But, when China exports more that it imports, the normal process is that the value of its currency should go up. But, in order to not allow this, China buys dollars in the market, and with these dollars it also buys US gov bonds. Maintain export competitveness by: industrial policy: very forward dynamic comparative advantage, wage/labor regression, exchange rate policy. When China sell things in the US but for a cheaper price, this increases even more demand, china making even more money. If currency rises that means it would be more expensive to buy goods, which in turn decreases demand. China wants to keep their demand high for exports and they do so by manipulate their currency. China's goal is to have one US dollar be equivalent to a lot of Yuan's. To buy Chinese product, America first has to buy Yuan's, which in turn drives up the demand and then the value of a Yuan. When the value of the Yuan goes up so does the price of the goods, decreasing demand. To counteract this, China drives up the value of the dollar. China buys bonds with US dollars, forcing up the value of the dollar.

Has the rise of China as an export powerhouse been detrimental in any way to working people in the U.S.? If so, how; and if not, why not?

In Pollin's opinion, yes. It has meant that US businesses have another form of leverage in bargaining with their employees. If workers say we want unions and higher wages, businesses are going to say we are going to move to China. It is not necessary for businesses to actually move to China, it is just enough to be a credible threat of going to China. So, US workers are traumatized, their bargaining positions have been weakened. If China's products are cheaper people will buy it over American made products, which are more expensive. This creates fewer jobs in the US and scares workers. Global trade in general but specifically with China has expanded the reserve army of labor. Workers are unable to bargain their wages because their employers can just go to cheaper sources. This happens even at low unemployment.

Consider the decade of the 1970s. What could explain the relationship between unemployment and inflation that we observe then for the U.S. economy, relative to the relationship we observe for the 1950s and 1960s?

In the 1970s, there was a positive relationship between inflation and unemployment. Unemployment and inflation were positively correlated due to the oil problem that occured then. This brought up unemployment while also increasing inflation. Inflation kept increasing even though unemployment wasn't changing. Non-accelerating inflation rate of unemployment (NAIRU) occurred and changed policy makers' minds. However, the relationship in the 1960s and 1950s was supported by the Phillips curve, where there was an inverse relationship between inflation and unemployment.

As a share of U.S. GDP, the federal government's fiscal deficit reached its highest level since World War II between 2009-12, then again over 2020 - 2021. What is the explanation for deficits reaching these unprecedented levels?

In the last 60 years the US debt has been almost 2% of GDP. Now it is 10% of GDP. The only other precedent for this is WWII. Had to borrow a lot of money to finance war. It got so big because the recession was severe. When recession is severe gov revenue goes down (sales taxes and income taxes go down), and on the other hand gov is spending more money to help with the recession (gov spends money to meet people's needs in a recession). The government borrowed in order to stop the economic downturn. The government had to put money into the banks that failed in order to ensure the economy could be kickstarted. 2009-12: The Great Recession was the reason for this deficit, as the government was forced to significantly increase spending to try and aid the economy in recovering from the recession. The government had to spend a significant amount of money on food stamps and similar programs, bailouts, and a stimulus package, while taking a hit in tax revenue. The economy was going down and so automatically there is less tax revenue and more government expenditure on fixing unemployment The Obama administration passed a stimulus policy to help bring the economy out of the recession. Government increased its spending and borrowed to do it Economy is going down and that means less tax revenue and there is more government expenditure for things like poverty control. Other part was that there was a stimulus policy to help the US get out of a recession on top of what was already spent on helping the economy.

What would be the reasons for the Fed to be raising the Federal Funds rate now? Is there a relationship between their most recent actions, and their understanding of the concept of the "natural rate of unemployment?"

Inflation, start to raise rates to slow down spending. Numbers from Feds that tell us natural unemployment rate is 4.7 % for U-3 so we are at full employment. Any further deductions could lead to inflationary measures. ~They started to raise the federal funds rate to stop this but we currently have weak GDP growth so the fed this month did not raise rate again because economy is already too slow. If it is too low then it can not work as a tool anymore. the Fed may choose to increase the federal funds rate (interest rate) if it predicts that the economy is heating up too much and causing prices to rise too rapidly (inflation). We are currently not at a point where the inflation is increasing, and Janet Yellen is guessing that we are close to the point where inflation will rise. The "natural rate of unemployment" is the point where unemployment rates are as low as possible without an increase in inflation, so yes there is a relationship.

It is also a widely held view that immigrants living in the U.S. are absorbing a significant share of the economy's available public services, without paying a proportional share of taxes to support these services. On balance, what does the evidence on this issue find?

It is false to say immigrants living in the U.S. are absorbing a significant share of the economy's available public services, without paying a proportional share of taxes to support these services. Undocumented workers don't not use a significant share of the economy's public services because they are undocumented. These workers are not taking any of their benefits. These undocumented workers are contributing to social security trust funds because they are taxed at jobs. They also pay sales tax on anything that they purchase but do not receive health care benefits. They work in many american companies and make their own businesses and pay their taxes. They also attract foreign investment which brings more money into the us

Evidence on inflation/unemployment trade-off: is it accurate to say that there is always a trade-off between unemployment and inflation? Compare evidence for the U.S. economy on a decade-by-decade basis. What do the patterns show?

It is not accurate to say that there is always a trade-off between inflation and unemployment. As time go by, unpredictable events occur and everything around the world shifts as well, altering the inflation and unemployment rates. Inflation rates and unemployment rates depend on the decade and are not always consistent and change. Whether or not there is a tradeoff between unemployment and inflation depends on which decade we are talking about. If we are talking about the 50s and 60s, then there is a trade-off between unemployment and inflation. This can be shown with the phillips curve in which the unemployment is low and inflation is high. There is also lower reserve army giving workers have more bargaining power. This drives up wages also driving up prices of goods and services. In 70s (oil spike) and 80s, the trade-off went away and the the inflation and unemployment rates both were high. And in the 90s, both of the rates were low. The workers did not have the same bargaining ability when there was low unemployment because companies would give the job to a country who have workers that would work for a fraction of what Americans would work for. There were more technological advancements, which made people feel replaceable. Globalization also became a problem, it was easier for companies to up and move to another country. This meant that workers felt replaceable and become "traumatized workers". Even at low unemployment, these workers had no job security making them unable to barging up their wages. Without workers bargaining up their wages, inflation also stayed low.

Karl Marx argued that the operation of a capitalist economy requires a "reserve army of labor"—or mass unemployment—in order for the system to continue functioning. Why did Marx think that capitalism could not operate if full employment is achieved and sustained?

Karl Marx believes that capitalism needs competition to work, and unemployment is some of that competition. Capitalists prefer the freedom of choosing their workers because they want the best fit. Also, with higher unemployment rates, those workers will be more restricted. "Reserve army of labor" would be put into place and there would be a decrease in bargaining power over benefits and wages because capitalists can more easily control what they pay their workers and could always hire someone else leading to more unemployment. If workers have more bargaining power over capitalists, capitalists would have lower profits causing them to be less willing to spend money on other projects leading to the decline of jobs and a cycle of inflation, another path to increased unemployment rates. In addition, Friedman believes that workers should be paid for what they're worth. If there is "full employment" and they are forced to hire anyone even if they are not skilled enough, the business may lose profits leading to another cycle of the decrease in jobs. This may sound idealistic but there will always be workers who are not willing to work for the given wage leading to labor unions.

What is the law of comparative advantage? Following the law of comparative advantage, why would any given country seek to specialize in producing one or two products and importing everything else they need, rather than diversifying?

Law of comparative advantage is that each country would thrive if it was specialized in a certain aspect of trading. It's more efficient for a country to specialize rather than producing every product. The law of comparative advantage encourages countries, regions and people to specialize enable to produce goods and services at a lower opportunity cost than other country, region or people. Any given country would seek to specialize in producing one or two products and importing everything else they needed rather than diversifying to be able to produce more of all goods and then trade them with other countries so everyone has more of everything. In the case of Pakistan and Belgium, Pakistan has comparative advantage in textiles and Belgium has comparative advantage in chocolate. Pakistan can produce 4,000 yards of textiles or 1 ton of chocolate per day, while Belgium can produce 1,000 yards of textiles or 4 tons of chocolate per day. To maximum the production of both textiles and chocolate, Pakistan and Belgium must follow the law of comparative advantage and produce what they are best at to produce more and then trade.

The Fed's mandate is to maximize employment in a manner consistent with price stability. The Fed's main policy tools have been to: 1) lower or raise the Federal Funds interest rate; and 2) lender of last resort policies. Be clear on what both of these policies are and how they differ.

Lender of last resorts means when financial institutions are in distress and they have made bad loans and they themselves need loans but nobody lends to them, the Fed comes in and functions as the lender of last resort. The other tool is federal funds rate. Lender of last resort is when the economy is failing they have the power to put money from the federal reserve back into the economy to keep it functioning. During the recession they bailed out banks and made sure the banks stayed operating. Rate was moved to 0% : Fed can move it wherever it wants. This means increase/ decrease buying power through fed funds interest rate Banks are hoarding $1.6 trillion at a 0% interest rate Lower or raise the Federal Funds interest rate: Banks have more money to lend so they lower interest rates. Rates that banks charge each other goes down. If the Fed is afraid that unemployment is low they will raise interest rates to make it harder for people to borrow before inflation is high. Lender of last resort policies: Bank bailouts, no one wants to lend to them so the Fed saves them from failing. Lowering the federal fund rate lowers all rates and hopes to stimulate business investment. Raising federal rates aims to slow down business investment and slow down a boom that may be too risky and excessive. bailouts- Had it not conducted bailouts, we would have had an even bigger crisis.

Rich, poor and middle-income countries: Be clear on some of the major differences between countries in terms of what the average person in each category of country can expect in terms of life expectancy and average income.

Per GDP per capita and life expectancy are good indicators for quality of life. Sweden>US>Haiti Rich: 80.8 years, over $12,475 per year per capita income Poor: 62.7 years, $1,025 per capita GDP per year Middle-income: 71.6 years, per capita GDP between $1,025 and $12,475 Life opportunities are dramatically different depending on where you're born. Avg. income in Haiti is around $700 a year with a life expectancy 55-60. Compared to Sweden where the avg. income is around $55,000 yearly and life expectancy of 80. There are countries in the middle, ex. Iran, avg. income is roughly $7000 with a life expectancy of 70.

*Beginning with the 2007 - 09 recession, the Fed introduced a new policy tool, which has come to be known as "quantitative easing." What are the basics of quantitative easing policy? How, if at all, does it differ from the two policy tools mentioned above? What was the basis for the Fed introducing this new policy tool?

Quantitative easing is when a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment. In other words, quantitative easing is when we buy bonds to lower the interest rates on savings and loans. That helps to keep inflation low and stable. The 1980s when the country had the big hatchet, the short term interest rate rose up to 18%. That was one of the reasons why quantitative easing was introduced because of the manipulations of the short term interest rate. The Fed may not have that much effect. But that means unemployment (10%) weren't fighting for hierarchy to get a job. It basically means that the Federal Reserve intervenes, not just to influence the Federal Funds Rate but also the short term interest rate between banks.

The main perspective other than "functional finance" on the governments running fiscal deficits are is the "sound finance" approach. What are the main differences between the "functional" and "sound" finance approaches? Consider this question with respect to both cyclical and structural deficits.

Sound finances: - Sound finances believe the government is not allowed to run deficits (government should not spend more than receives). - government borrowing is bad, not using own money, using other money -deficits should always be balanced except in wartime (never have deficit except in wartime) ~political and economic considerations: don't trust politicians with money -governments should balance books 'like households' Functional finance: - Functional finance believes that a fall in the economy requires government deficit (government spends more than receives) government deficits can be justified if the serve a specific function (stimulus) - functional finance deficit to counter the recession - government should borrow to combat recession - cyclical finance functional finance would increase - structural finance neither would increase

Be clear on where the U.S. stands in the global economy. How big is the U.S. economy as a share of the global economy? How important is the U.S. in terms of population? In terms of addressing climate change?

The U.S. is only a small part of the world, constituting less than 5 percent of the world's population, but is the world's single largest economy and leading global trader. They have 22% of the worlds GDP. It is the world's largest importer and exporter of goods and services. This also makes the U.S. a large influencer in climate change with 16% of emissions coming from them. Because the US has a continuous goal to improve its economy, this leads to a lot of damage to its environment. The United States lacks federal climate action, so state and local governments are leading the way and creating polices for a just and inclusive clean energy economy.

The debates on the recent macroeconomic crises and on solutions for getting out of them involve both philosophical positions and technical debates on policy tools. How would you distinguish between the philosophical viewpoints? How would you distinguish the technical debates on policy approaches?

The case of Taylor is an excellent example. If you look at him it is clear where he stands politically, and also his philosophical position is to maximize human freedom. If you look at Pollin it is obvious that he also values other philosophical positions like equality. Taylor is so strongly committed to his philosophical views that they spill over to his policy positions on, for instance, fiscal deficit. So there is an inter connection between these philosophical positions and policy recommendation. *Debate on philosophical positions *Big governments are bad because they limit human freedom -Free market maximizes human freedom -Government should have no say in wages *Technical argument -If the government engages in functional finance, will that generate a beneficial/ favorable outcome ? *Zero government involvement -Minimal government will lead to more personal freedom -Let people do what they want Invisible hand -Markets are self-regulating to the government should stay out of it -Anti-welfare *Pro government involvement -Some restrictions are necessary -Minimum wage helps -Stabilize financial markets to avoid a recession -Public education *Does minimum wage help? -Unintended consequences *Deficits -We need to balance the budget -Pollin & Hernan ~It has not been a huge problem in economy growth - Was the repeal the cause ? Should governments be able to go into debts? Philosophical positions say no. Big gov. are bad and put a limit on human freedom, free market maximizes human freedom. The technical debate is if the Gov. uses functional finance will it generate a favorable outcome? Phil. Position on min. wage the Gov. shouldn't be making businesses follow a certain min. wage. -Philosophical viewpoints: big picture arguments beliefs and questions ex. Government intervention, often use technical arguments to support philosophical -Technical viewpoints: more detailed less opinionated and more factual like functional vs sound finance, regulation vs deregulation, consequences of higher minimum wage A Lot of technical debates, like around functional finance Should gov engage in federal spending Economists get into these technical debates and they make technical arguments as to why regulating wall street is bad/ good, there are back and forths of technical debates, underneath there are philosophical considerations that play into technical debates Ex: does minimum wage increase unemployment You can have technical position on this that wouldn't necessarily correspond to philosophical position Philosophically you push for anti regulation of business (bad in terms of pollin) Some people say no this is technical argument, nothing to do with point of view wrong

Within the context of functional finance, what is the justification for the government running deficits during recessions, such as the ones we experienced over 2007-09 and again over 2020 - 2021?

The justification is, if you don't run a deficit, you will have an even more severe recession. Countercyclical policy attempts to smoothen out peaks and troughs of the economy. When times are good, the government cuts back on spending, but in times of economic turmoil, the government increases spending and cuts back taxation. By doing this, the government deficit goes up, but it is necessary when the economy is in bad shape. By 2008 everyone knew we were in a severe crisis. 2008 we used functional finance and it starts in 2009. Government borrowed a lot of money to counteract the recession and went into a lot of debt. If the economy enters a recession taxes will fall as income and employment fall. At the same time, government spending will increase as people are given unemployment compensation and other transfers such as welfare payments. Such automatic changes in revenue and expenditures work to increase the deficit. Functional finance: It is the role of government to stave off inflation and unemployment by controlling consumer spending through the raising and lowering of taxes.

*What was the logic of the Fed pushing the Federal Funds rate down to near zero during the 2007 - 09 crisis, and then again during the COVID lockdown? What would be the logic of the Fed ending this policy now?

The logic of the Fed pushing the Federal Funds rate down to near 0 during the Great Recession, and then during Covid lockdown is to stimulate the economy to counteract the recessionary forces. The logic of the Fed ending this policy now is because we had covid lockdown again and the interest does go to 0 again. They don't want to stimulate the economy right now. They actually want to slow down the economy.

China's successful growth experience since the early 1980s has been closely tied to its achievements as an exporter, with the United States being the largest single purchaser of Chinese-made products. What have been the main factors behind China's success in exports?

The main factors behind China's success in exports is keeping their currency cheap, having cheap labor and producing goods that people want to buy at mass quantity at low costs. China is considered to be a currency manipulator because they have maintained their currency at low level to keep price of exports low in other foreign markets. Also, low wage labor and investment into infrastructure assisted with their success in exports. China needed to increase its productivity. It did this by improving it's technology. China then had lower wages when it had an educated labor force and machinery. They then manipulate their curreny in order to sell products for seemingly cheap.

The most widely cited official unemployment rate figure for the U.S. today is 3.6 percent. What exactly is that statistic measuring? How, if at all, does that measure take account of people who are "underemployed" or "discouraged" from trying to find a job?

There are various ways to defining "unemployed". In this case, the statistic does not consider everyone who are unemployed. It measures those who do not have a full-time, part-time, or temporary job. Additionally, they are actively looking for a job and to be hired, and capable of working. They could have also been temporarily laid off. It does not measure those who are underemployed or discouraged from trying to find a job. Since it does not consider all unemployment, the real unemployment rate is greater.

It is a widely held view among some politicians and authors (e.g. Camerota, NY Times) that immigrants in the U.S. labor market hurt job prospects for native U.S. workers. Why might this be the case? On balance, what does the evidence on this issue find?

There is mixed evidence on whether immigrants in the US labor market hurt job prospects for native US workers. Many claim that the increase in labor supply pushes down wages but when studies were conducted there was no evidence of downward pressure. Immigrants increase demand because there is more spending in the economy. This leads to more need in labor which driving up wages.

If we consider the cases of South Korea and China, is it accurate to say that their successful growth experiences have been tied to the idea of comparative advantage? In this context, be able to distinguish between "static" and "dynamic" comparative advantage.

Yes, they had dynamic comparative advantage, where instead of focusing on what defined their economy (static), they specialized in what they wanted to: high demand cars. Unlike belgium and pakistan, they focused their comparative advantage on where they would be say 20 years from now. 40 years ago, china wasn't advanced and wouldn't be focusing on solar panels and machinery, but it is their future. By pursuing industrial policy, they were able to improve living standards. Korea used to be very poor but is now on par with much of Europe. China took the model first from Japan and then from Korea. Off course the experiments aren't exactly the same, but China has succeeded. So the textbook helps us understand only the static comparative advantage, not the dynamic one that helps a country go from a low income to a middle to high income country.

How did the government try to get out of the crisis using monetary policy, fiscal policy, and financial regulatory policies?

government borrowed from the fed so they can spend to stimulate economy 1- Monetary policy (the control of the quantity of money available in an economy and the channels by which new money is supplied): The fed changed the money supply which is monetary policy by creating more of it to be available to the public. Control interest rates...lower them by driving down the federal funds rate to zero. federal reserve and bailouts, keeping interest rate down to zero. Lowered interest rates from 5.3% to 0.1% Encourages people to borrow money and buy products and invest Bailed out the banks (when the government gives financial support to rescue a company that is in financial trouble and possibly at risk for bankruptcy) 2- Fiscal policy: bailouts, Increase in deficit spending and government stimulus plan, Lower taxes, Increase Gov. spendingLender of last resort: U.S. treasury bailed out banks, financial reserve bailed out Wall Street. This prevented institutions from collapsing and deepening rescission and hurting innocent people. he fed also made fiscal policy by keeping interest rates low. 3- Regulatory policy: Institute a system of regulations Dodd Frank 2010 (designed to prevent bubbles) Regulate Wall Street Stop banks from gambling with people's money If people see big risks that have to tell people Attempting to make sure big banks should not be too big Overseeing credit rating companies We did not recognize the crisis until it was happening December 2007, crisis starts Top 10 banks were evaluated at being fundamentally sound As for financial regulatory policies the government enacted the Dodd-Frank which was created to regulate banks so a crisis like the recession would never happen again. New law, Dodd-Frank is designed to prevent over-leveraging. It coordinates the actions of several regulatory bodies (such as the Fed, SEC, and the treasury). It is imposes some regulation on previously unregulated hedge funds and financial derivatives, and creates the Consumer Financial Protections Bureau. It is also supposed to control "proprietary trading", which is trading on a bank's own corporate accounts. Proprietary trading may keep a bank from focusing on its clients, whose interests should be the primary concern of the bank.Dodd-Frank was signed into law by president Obama in 2010, but hasn't been very effective. One reason is because it wasn't intended to be effective in the first place. It is in excess of 800 pages, and the longer it is the easier it is to get around it. Wall street didn't want Dodd-Frank, but they had to pass some kind of law. So they stalled as much as they could, and in the meantime banks started to find ways to get around it. Goal was to limit financial speculation in the long run. Deregulation, had we not repealed regulatory laws it wouldn't have been badInequality, the proportion of national income going to the rich keeps risingBy 2007 it was 23% as a share of national incomeWealthy people do spend, but most goes into investments, like wall streetMagnitude of the bubble got bigger because there was more money available than there would've been if wealthy people didn't get such a large percentage of money

*During the COVID lockdown, the combined bailout operations of the U.S. Treasury and Federal Reserve reached unprecedented levels. This included federal government deficit spending and Federal Reserve asset purchases. Be able to describe the main features of these interventions. Also consider whether you think these interventions were necessary during the COVID lockdown. Do you think some alternative policy measures would have been more effective and/or fair in this situation?

look at professor's article, if i agree or not with him