Discussion Board

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User Generated

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oxbyn04

Subject

Economics

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Please respond for peer comments:

1) The topics that I found interesting are Money illusion, 45 Degree reference line, Relation between the AD and C+I+G+X Curve, Crowding out effect and Steps undergoing by the government to reduce its deficits. I was surprised about the illegal inflation as I never came across this topic before. I do have questions listed below:

Is illegal inflation useful or not?

Is it possible for all the governments to do inflation illegal?

What are the circumstances that people or government has to face later due to illegal inflation?

2) The crowding-out effect is a relatively new term that I am not familiar with. It is a five-step process, and it first develops when government spending exceeds tax revenues. If it reaches the last step, then this means that there is more government spending that exists and less consumption. In Chapter 14, it goes into detail about the public debt. This can hurt future generations due to higher tax rates and affect the overall economic growth.

3) In Chapter 10, I found the interest rate effect interesting. I thought it was interesting because I have to pay interest on loans in order to pay for attending college. The interest rate effect also causes a downward slop in the aggregate demand curve.

In Chapter 11, I thought that demand-pull inflation and cost-push inflation were interesting. Demand-pull inflation occurs when there in an increase in aggregate demand that differs from the increase in aggregate supply. Cost-push inflation occurs when there is a decrease in short-run aggregate supply.

In Chapter 12, I found it interesting to find out what producer durables were. Capital goods are producer durables, and that just means that they are goods used to make other goods.

In Chapter 13, I had questions in regards to the Richardian Equivalence Theorem. I was confused on how someone could assume that taxes would be raised in the future due to an increased deficit that does nothing to aggregate demand.

In Chapter 14, I found it interesting that the net public debt increased during World War II. I also found it interesting that it has been on the rise and fall ever since, and is currently increasing again.

and next chapters assignment: Discussion board 3

Please find the below attachments

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Chapter 15 Money, Banking, and Central Banking Introduction During the early 2000s, bank managers in the U.S. sought to boost total deposits at their institutions. In the early 2010s, their efforts paid off: Total deposits at U.S. banks had increased by about 10 percent. Since then, however, banks have generally reversed course. Most banks have halted their efforts to attract more deposits, and a few have begun discouraging increases in funds held on deposit. What accounts for this abrupt change? In Chapter 15, you will learn the answer to this question. Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-2 Learning Objectives • Define the fundamental functions of money • Identify key properties that any good that functions as money must possess • Explain official definitions of the quantity of money in circulation • Understand why financial intermediaries such as banks exist Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-3 Learning Objectives (cont'd) • Describe the basic structure and functions of the Federal Reserve System • Determine the maximum potential extent that the money supply will change following a Federal Reserve monetary policy action • Explain the essential features of federal deposit insurance Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-4 Chapter Outline • The Functions of Money • Properties of Money • Defining Money • Financial Intermediation and Banks • The Federal Reserve System: The U.S. Central Bank Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-5 Chapter Outline (cont’d) • Fractional Reserve Banking, the Federal Reserve, and the Money Supply • Federal Deposit Insurance Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-6 Did You Know That ... • Since 2009, U.S. consumers have increased their use of currency and coins to make payments? • This means that the public’s holdings of cash have increased, even as more funds are being held on deposit with banks. • Currency, coins, and deposits all are included by the Federal Reserve in its measure of money. Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-7 Did You Know That … (cont’d) • Money – Any medium that is universally accepted in an economy both by sellers of goods and services as payment for those goods and services and by creditors as payment for debts Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-8 Table 15-1 Types of Money Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-9 The Functions of Money • The functions of money – Medium of exchange – Unit of accounting – Store of value (purchasing power) – Standard of deferred payment Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-10 The Functions of Money (cont'd) • Medium of Exchange – Any item that sellers will accept as payment – Money facilitates exchange by reducing transaction costs associated with means-ofpayment uncertainty • Permits specialization, facilitates efficiencies Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-11 The Functions of Money (cont'd) • Barter – The direct exchange of goods and services for other goods and services without the use of money – Simply a direct exchange requires a double coincidence of wants Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-12 The Functions of Money (cont'd) • Unit of Accounting – A measure by which prices are expressed – The common denominator of the price system – A central property of money Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-13 The Functions of Money (cont'd) • Store of Value – The ability to hold value over time – A necessary property of money – Money allows you to transfer value (wealth) into the future Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-14 The Functions of Money (cont'd) • Standard of Deferred Payment – A property of an item that makes it desirable for use as a means of settling debts maturing in the future – An essential property of money Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-15 Properties of Money • Liquidity – The degree to which an asset can be acquired or disposed of without much danger of any intervening loss in nominal value and with small transaction costs – Money is the most liquid asset Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-16 Figure 15-1 Degrees of Liquidity Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-17 Properties of Money (cont’d) • Question – What is the cost of holding money (its opportunity cost)? • Answer – It is the alternative interest yield obtainable by holding some other asset Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-18 Properties of Money (cont’d) • Questions – What backs money? – Is it gold, silver, or the federal government? • Answer – Your confidence Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-19 Properties of Money (cont’d) • Transactions Deposits – Checkable and debitable account balances in commercial banks and other types of financial institutions, such as credit unions and mutual savings banks – Any accounts in financial institutions on which you can easily transmit debit-card and check payments without many restrictions Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-20 Properties of Money (cont’d) • Fiduciary Monetary System – A system in which currency is issued by the government and its value rests on the public’s confidence that it can be exchanged for goods and services – The Latin fiducia means “trust” or “confidence” Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-21 Properties of Money (cont’d) • Currency and transactions deposits are money because of their – Acceptability – Predictability of value Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-22 Defining Money • Money is important – Changes in the rate at which the money supply increases or decreases affect important economic variables (at least in the short run) such as inflation, interest rates, employment, and the level of real GDP • Money Supply – The amount of money in circulation Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-23 Defining Money (cont'd) • Economists use two basic approaches to define and measure money – The transactions approach – The liquidity approach Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-24 Defining Money (cont'd) • Transactions Approach – A method of measuring the money supply by looking at money as a medium of exchange • Liquidity Approach – A method of measuring the money supply by looking at money as a temporary store of value Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-25 Defining Money (cont'd) • The transactions approach to measuring money: M1 – Currency and coins – Transactions (checkable) deposits – Traveler’s checks Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-26 Figure 15-2 Composition of the U.S. M1 and M2 Money Supply, 2011, Panel (a) Sources: Federal Reserve Bulletin; Economic Indicators, various issues; author’s estimates. Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-27 Figure 15-2 Composition of the U.S. M1 and M2 Money Supply, 2011, Panel (b) Sources: Federal Reserve Bulletin; Economic Indicators, various issues; author’s estimates. Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-28 Defining Money (cont'd) • M1 – Currency • Minted coins and paper currency not deposited in financial institutions • The bulk of currency “in circulation” actually does not circulate within the U.S. borders Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-29 Defining Money (cont'd) • M1 – Transactions deposits • Any deposits in a thrift institution or a commercial bank on which a check may be written or debit card used – Thrift Institution • Financial institutions that receive most of their funds from the savings of the public Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-30 Defining Money (cont'd) • M1 – Traveler’s Checks • Financial instruments purchased from a bank or a nonbanking organization and signed during purchase that can be used as cash upon a second signature by the purchaser Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-31 Defining Money (cont'd) • The liquidity approach to measuring money: M2 • Assets that are almost money • Highly liquid • Easily converted to cash • Time deposits are an example Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-32 Defining Money (cont'd) • The liquidity approach: M2 is equal to M1 plus 1. Savings deposits 2. Small denomination (
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Running head: RESPONSE TO PEER COMMENTS

Response to Peer Comments
Name
Institution

1

RESPONSE TO PEER COMMENTS

2

Response to Peer Comments
Response 1
Inflation in any form is not good for an economy because it increases the cost of living by
reducing the purchasing power of consumers. The approach used by governments to do inflation
illegal is largely based on its political benefits more than the economic one. For example in the
United States, the effect of illegal inflation can be explained using the scenario of how the
government controls the supply and spending of newly printed money. First, its focus on interest
on debts before expanding to social services those provide an opportunity for the federal
employee to earn more wages and results in a ripple effect in other sectors of the economy.
Response 2
As you noted, the crowding-out effect can hurt the future generation of a large economy
such as the United Stat...