EVERY THING BASED ON NOTES NOT FROM THE WEB* 1. “ Policy ” (1 page) 2. Define and explain how it work with example, Diseasing issue & problems: a) Fiscal policy (1 page) b) Monetary policy (1 page) c) Supply side policy (1 page) 3. “Multiplier” (1 page) 4. Macro/ micro model (1 page) [All on one page get the information from Fiscal, monetary and supply side meaning from the note’s] a) Write three advantages and three disadvantages For Fiscal Policy. b) Write three advantages and three disadvantages For monetary Policy. c) Write three advantages and three disadvantages For supply side Policy. *EVERY THING BASED ON NOTES NOT FROM THE WEB* PLEASE ORGANIZE
Definition of Economics
Economics is a science that relates to how human decisions facilitate resources allocation. To understand and appreciate what this definition means, each term should be itself defined and described.
The term “science” is used to define an array of elements. This is because it encompasses such subjects as chemistry, biology, physics, and social sciences. The latter, unlike other scientific disciplines, try to explain the prevalent societal changes. Social science has a common feature with all other sciences as it also seeks to explain intricacies emanating from special aspects affecting humanity. What is more, another universal element between all sciences is that they define the cause and the effect in their respective fields.
For instance, biology seeks to understand the cause and the effect with regard to relationships within in living organisms. An example would be the study of the reproduction process of the Pacific salmon. Chemistry might seek to understand the bonding relationships between certain metals. Physics, on the other hand, might seek to analyze and understand the death of a star. Cause and cffect in any science is about understanding relationships between independent and dependent variables. In other words, a change in one thing causes a change in another thing. For example, a dramatical change of the temperature of water (an Independent Variable) causes an alteration in the water (a Dependent Variable) which turns to steam. Another example would be changing of the gene sequence of a chromosome (the Independent Variable) that alters the physical characteristics of a living organism (the Dependent Variable).
A science seeking to unravel human decisions only exists if there are Cause & Effect relationships between the actual decisions (the Dependent Variable) and other controllable factors (Independent Variables). It is worth noting that each decision attained by humanity emanates from a science. This implies that decision-making is not only a skill but also a science embraced by humanity to foster better livelihoods. The decision as a dependent variable is predictable through the independent variables causing the initial transition in decision-making. In some instances, individuals try to make different and sometimes almost irrational decisions caused by an array of reasons. That is why, it is vital for humanity to understand the prevalent underlying relations between numerous independent variables and decisions (dependent variable).
Decision Making Laws
There are five critical elements that affect the decision making process. Freedom is the first element that either hinders or betters the decision making process of an individual. Freedom is a physical capacity to choose to disregard any pressure, and it is a conscious act of the human mind. For freedom to be exercised or expressed, the individual has to be aware, conscious, and undertake it voluntarily. It is worth mentioning that there are certainly degrees of freedom affected by the varying degrees of consciousness and awareness with regard to the decision making process. In the event that variations in degree levels are eliminated, freedom can be defined erroneously.
Liberty is the second element affecting the decision making process. This concept is not related to a conscious or a voluntary process; instead, it is the object or the focus of freedom. Liberty measures the independent and separate choices or alternatives that freedom recognizes and considers. For instance, an individual may choose to have an apple or a pecan pie for dessert. In other instances, the same individual may choose to have either both or none. In both cases, freedom is unearthed through considering the two separate liberties (choices, alternatives) from which one to choose. Liberties have a wide scope for application, and, thus, they require guidance. A student might apply liberty while considering several colleges available for education. A decision made by a human is confined to the feasible choices which might involve four or more different education options.
Scarcity is the third law governing human decisions. Every human decision is driven by scarcity that is an integral part of humanity. Regardless of social stature, young or old, rich or poor, powerful or weak, human beings have limited or scarce liberties to choose. This is the human condition emanating from the fact that opportunities and resources are also available in limitation. Both money and time are a measure of the number of liberties people can get access to. No one has sufficient money to serve all the pertinent desires or wants. Bill Gates, who features among the richest and well-endowed individuals of the current generation, knows scarcity just as well as another person. This is because Bill Gates does not have the financial muscle which he might need to solve world poverty problems or alleviate the American educational program. Money certainly represents liberties, but it has its finite limits. The human imagination and desires are the only elements that exhibit limitless demarcations.
Selfishness is the fourth element affecting the decision making process. Self interest, which is also known as selfishness, is not only an essential but also the final component to every decision. Human beings need to be aware of the available exercisable freedoms, and, what is more, they should be focused on them seeking to enhance decision-making. It is vital to enlighten individuals to ensure that they recognize the separate liberties and understand that these liberties are scarce. Ultimately, people need to choose just one of the liberties identified ascertaining that the decision attained is feasible and practical. Catalysts affect the decision-making process in that they stimulate individuals in a non-defined manner. This catalyst or motivation, driving the actual selection of one single liberty perhaps among many alternative liberties, is elf interest.
Allocation of Resources
Resources refer to innumerable aspects of the social setting. They are encompassed in the universe and significantly aid human-related endeavors. The significance in this respect must be recognized, especially once coupled with the allocation. Allocation refers to the determination of who receives and who gets to make what. Allocation of resources pegs as a government based mandate given its severe magnitude. In the instance when resources are allocated inadequately, some individuals will thrive more than their counterparts. In the light of these sentiments, allocation of resources is significant and calls for soberness, equity, and justice in ensuring equitable resource distribution.
Inflation / RGDP & Unemployment
There are three macro variables, which include Inflation (CPI), Unemployment, (UE), and RGDP. All the variables measure the allocation of resources encompassing an entire nation. For instance, unemployment measures the number of individuals benefiting from regular income and attached employment benefits. RGDP estimates the quantity of material required to sustain production cycles. Inflation assesses the purchasing power of individuals indicating the disparity between different income earners. These three variables, when working together, avail a reliable measure of the prevailing economic conditions and the way it is distributed among households in an economy.
It is worth noting that given the dynamic nature of the economic conditions the macroeconomic elements indicate any changes. These three macroeconomic variables are both independent and dependent ones. The variables interact with each other causing immense changes that either improve or worsen the economic conditions. The three macro economic variables operate similarly to the demand and supply graphs. This is because their main function is to indicate changes in the economy or depict prevailing trends.
Inflation is a vital macroeconomic variable measured through the consumer price index (CPI). The latter is referred to as the estimated percentage change in the average price of a market basket of goods and services between one period and another. The Commerce department using data and statistical methods to create and compare the index between different economic periods, estimates the consumer price index. When creating a consumer price index, not all commodities are included but only those frequently purchased are placed in a virtual market basket. In addition, the total price of the entire market basket is determined through market rates. Such items as cars, housing rent, food, haircut, clothes, and landscaping services are added together. An adjustment is then made with regard to each item with a weight to reflect its importance in the average family budget. For example, if the average family spends 35% of its monthly income on rent, it weighs 35. Once the market basket of weighted goods and services is totaled, then, a number divides it so that it equals 100. This figure represents a basic number of years for the index. After a given duration of years, probably five, the market basket is run through the checkout stand. This involves a periodical totaling and weighting according to the weighted total. This total is again divided by the same number as before. If average prices have gone up, the new number will be greater than 100, say 140. This would mean that prices have risen to 40% over the 5-year period.
Some key challenges and inaccuracies threaten the reliance of the consumer price index. They emanate from the fact that the actual items of goods and services are included in the market basket and their weights or importance in the basket changes over time. It is necessary to indicate that the longer the duration between measuring the prices of a commodity basket is, the higher is the difference. For example, in the early 1900s, cell phones were not a part of the commodity basket, but they defiantly comprised the modern commodity basket.
Real Gross Domestic Product (RGDP)
Real Gross Domestic Product is the estimated combined total real market value of all domestic final goods and services produced within a certain period. Real Gross Domestic Product is a “Super Q” in that it is the total of all goods and services got from every domestic market in the country. For example, this is a total of all cars, textbooks, toothpicks, shoes, and jumbo jets produced in a given period of time within the boundaries of a country. Evidently, it is only estimated based on surveys and reports such as the tax returns or consumer surveys. As any estimate, it is not exact as it is an approximation bearing salient misgivings in the event it is adopted without worthy provisions. The total output produced in the country resonates from adding up all sales with a common denominator, which is more often than not the dollar. Dollars from cars as well as dollars from socks, dollars from piano lessons, and dollars from many other activities aid in the Real Gross Domestic Product calculation. To use this common denominator and then to compare one year’s Real Gross Domestic Product with another adjustment for inflation changes has to be undertaken. This ensures that the measure compares actual changes in output, hence reflecting any prevalent changes.
Most products in the American economy are partially produced in the country, while the remainder is produced in foreign countries. In the instance America seeks to calculate the country’s Real Gross Domestic Product, the measure will be only the $ value of the domestic part of the production. This implies that the Real Gross Domestic Product disregards any foreign commodity in a country. It is vital to note that Real Gross Domestic Product only evaluates final goods and services. This is because in the event Real Gross Domestic Product fails to incorporate the final product, calculating the value of raw materials will amount to double measurement. For instance, the counting of 100 sacks of sugar and doughnuts that are sold by a company amounts to double calculation. This is because the cost of the sugar is inculcated in the selling or market price of the doughnut. Real Gross Domestic Product measures and compares the amount of production between one time period and another, say 1997 and 2007.
Economics is a science concerned with predicting the future. Conversely, economics focuses on the recent changes in Real Gross Domestic Product since this accurately forecasts how much will be produced in the future.
It is essential to consider the effect of output in modern society as opposed to the quality or value of the product. Some opinionated business magnates indicate that the business realm only focuses on the output’s value. First, the Real Gross Domestic Product negating the effect of the commodity on the surrounding environment has to be indoctrinated in the calculation. This implies that the Real Gross Domestic Product can only measure goods and services valued in dollars or any other currency. It cannot account for the negative effects and societal vices related to the production endeavors which might include pollution, crowded freeways, crime filled streets, or sick children.
Secondly, the Real Gross Domestic Product does not account for the innumerable illegal transactions undertaken in an economy such as illegal drug trafficking, prostitution, and transactions enacted seeking to avoid taxes. The black market encompasses a great deal of commodities which go undetected, hence they fail to comprise the Real Gross Domestic Product.
Thirdly, the growth of the Real Gross Domestic Product does not mean that the distribution of output is equal or fair. It simply means the entire economy is expanding but fails to evaluate whether an equitable distribution of resources is achieved. In fact, some individual’s wealth is increasing over time, while others experience constricting. The above mentioned information demonstrates that the Real Gross Domestic Product is far from a being perfect measure of the standard of living. It estimates only incorporating legal $ transactions, and, thus, it has numerous omissions and assumptions. The Real Gross Domestic Product statistically disregards anything relating to fairness or equitable distribution of economic resources.
Unemployment is an estimated percentage of the entire labor market not presently employed. The key to the definition of unemployment is the term “labor market” which is in line with the fact that most individuals who are 18 years and above indulge in employment search. In some countries that do not have enough regulation, the labor market stretches to 16 years. Homemakers, retirees, active military, disabled are not considered to be unemployed. This makes sense since the unemployed comprise only the individuals in search for placement as opposed to those who cannot or will not work. Statistics is both advantageous and disadvantageous in that it avails worthy information classifying unemployment into different categories.
Types of Unemployment
Seasonal unemployment emanates from the varied seasons in economic situations. For instance, Christmas, Halloween, and the Fourth of July encompass seasonal unemployment. Very often this type of unemployment is adjusted out of the public unemployment figures provided. Seasonal unemployment is not unemployment parse since it does not have numerous negative effects emanating from authentic unemployment.
Structural unemployment is persistent unemployment found in a particular geographical area or industry. Under-skilled workers with significant retraining needs typify this unemployment from before they can be re-employed. In the instance where structural unemployment is persistent, it has significant detrimental consequences to both the industries and societal settings.
Cyclical unemployment is the worst form of unemployment evidenced in an economy. Macroeconomics aims at minimizing or even eliminating cyclical unemployment given its negative attributes. Economies move in cycles; this is evidenced by periods of rising employment rates in many or the majority of areas followed by periods of joblessness in many or the majority of employment fields. Diminished Real Gross Domestic Product characterizes cyclical unemployment.
Frictional unemployment, on the other hand, is essential for healthy economic conditions. Frictional unemployment is also called natural unemployment. The frictional unemployment results from employers and employees exercising freewill seeking to make different and better decisions. In essence, frictional unemployment resonates from the urge to better the employment conditions. Employees have the freedom to leave lousy paying jobs for better-packaged or compensating jobs. In addition, frictional unemployment avails an opportunity for the employees to move to passionate jobs that revolve around their desires. Employers have the opportunity of firing an employee who is lazy and shows little productivity or laying off workers due to the lack of demand for your product.
Without frictional unemployment, all the employees and employers would be enslaved. Moreover, no decisions would be undertaken seeking to change the status quo, and everything would be static. This would resemble Europe in its formative years. Frictional unemployment for a healthy growing economy is presently estimated to be about 4-4.5 %. At this rate, the negative effects of unemployment like the increased crime rate or corruption are minimal and fail to damage social well-being. However, unemployment above this figure would be either cyclical or structural.
Unemployment is complicated as it encompasses some economic intricacies that require sufficient information to unravel. For instance, an individual who is well-trained and mature but disregards the importance of employment should not be classified as unemployed. Such an unemployment status is voluntary as opposed to a situation with a lack of job opportunities. Many people in this category are impoverished and leave unpleasant lives, to say the least. Conversely, the employed citizens remit innumerable amounts to the government in the form of taxes. It is inhumane to consider that a portion of the taxes offer even meager support for the jobless in this society some of whom voluntarily fail to work. Social services are largely directed to people in this category diminishing the amount of money distributable to the aged, the disabled, or the ill in society. It is an unfortunate and lousy mechanism of allocating the resources in the modern society. It is also apparent that even a low unemployment rate containing only good and healthy unemployment fails to acknowledge and count the voluntary unemployed individuals. Given the prevalent increase in voluntary unemployment, the employment rate in many economies warrants urgent redress. It is vital for governments, institutions, and the business fraternity to understand what unemployment means for an amicable solution to be attainable.
Fiscal policy is not just about the government spending money. Fiscal policy describes the relationship between combined spending (Aggregate Demand) and the Macro goals of low unemployment, low inflation, and desired growth in Real Gross Domestic Product. In simpler words, changes in spending AD = (C + I + G + Xp) do cause changes in one or more macro variables. Changes in spending can and often do result in alterations related to unemployment, inflation, or the Real Gross Domestic Product. There is a cause and effect relationship between an aggregate demand as an independent variable and the three Macro variables as dependent variables.
The economy’s combined spending consists of the spending in each of the four components of the economy. They include Consumption (C), Investment (I), Government (G), and Exports (Ex). If the spending of any element rises, while the other components remain constant, the total of an aggregate demand will increase. The increased spending in any or all of the components will cause the demand for more goods and services to be produced. This will cause a reduction in unemployment, an increase in Real Gross Domestic Product, and a raise in Inflation. Consumption and Investment spending can be changed by a number of real world variables such as income, taxes, beliefs about the future, and interest rates. Certain changes in these independent variables will cause changes in Consumption and Investment. For example, an increase in income will most likely raise spending done by consumers and the investment community. Similarly, lower interest rates resulting in lower borrowing costs will raise borrowing and spending in both Consumption and Investment.
Fiscal Policy is a government plan with a goal to change aggregate demand seeking to cause a resultant change in one or all of the macroeconomic variables. An increase in Government spending raises total spending aggregate demand, thus influencing inflation, unemployment, and the Real Gross Domestic Product itself. New government programs that result in new or additional government spending with a plan or a goal are theexamples of fiscal policy. Similarly, a policy of the government to reduce taxes would change disposable income and cause more spending with regard to Consumers and Investment. This will ultimately increase an aggregate demand and change the microeconomic variables. Higher taxes would have the opposite effect. Government spending in the private sector through consumption and investment stimulates economic performance. The new income and spending in the private sector becomes multiplied within the same sector. Over time, the total increase in spending caused by the initial new income received from the government’s spending is far greater than the initial boost in spending.
A helpful analogy is skipping of a stone on a pond. The first skip spans the greatest distance that with each succeeding skip becomes smaller and smaller. Just as the thrown stone loses energy, the spending loses $’s because some of it is not spent and is saved by each recipient during each spending cycle. For instance, a consumer buys something from a retail chain worth $100, and the owner of the store saves $10 and purchases a replacement worth $90 from the supplier. In turn, the supplier saves out another $9 and buys something from the manufacturer worth $81. In the instance that the routine savings trend continues, the expenditure will eventually end. If every spending from different transactions was summed up, total spending would reach $1000 and not just $100. Therefore, it is evident that people change their saving habits. If the initial savings were not $10 but $20 and everyone did the same, then the total multiplier effect would be much less. In reality, the multiplier changes because individuals’ perspectives also change. Independent variables like future expectations of financial gloom cause humanity to save more now than people used to in the past. In other words, the multiplier is dynamic and constantly changing.
Another form of aggregate demand or spending policy is the Monetary Policy. Unlike the Fiscal Policy, which directly changes spending, this strategy is an indirect one. It is independently administered by the Federal Reserve System and indirectly changes national spending in the private sector influencing the money supply and interest rates. Increasing the money supply, MS will cause a reduction in interest rates (the price of renting money). If the money supply decreases, interest rates will ultimately raise. Higher interest rates tend to cause borrowers to borrow less and, thus, spend less. In contrast, lower rates tend to cause borrowers to borrow, and, thus, spend more.
The Federal Reserve can change interest rates and the amount of the money supply in one of three ways. First, it can increase or decrease the required reserve ratio of bank of deposits. This represents the percentage of total deposits banks are required to maintain by the law without lending. The increase of this percentage causes the banks to have less available funds to lend out. As a result, interest rates stay high, and borrowing and spending go down. A decrease in the percentage causes a decrease in the amount of funds available to lend out and interest rates fall resulting in more borrowing and spending. Secondly, the Federal Reserve can change the Discount Rate (the interest rate) wherefrom the Federal Reserve charge banks borrow cash when seeking to meet their required minimum deposit reserves. Higher borrowing rates mean that banks borrow less often and keep more money in the bank. Banks seek to avoid the interest charges from borrowing money from the Federal Reserve. A lower discount rate has the opposite effect.
Finally, the Federal Reserve can engage in Open Market operations, which is buying or selling bonds to the open market. Since the money supply consists only of cash and checking account balances, the buying of bonds offering $’s in checking accounts in exchange for bonds in the economy causes an increase. More bank deposits decrease interest rates, thus raising spending. It is apparent that there are innumerable variables that affect the borrowing ability of both consumers and the business fraternity. The examples in this respect include income, future fears, unemployment etc. Since these variables will sometimes change without direct connection to government policy, it is impossible to predict precisely the impact of changing interest rates on borrowing and spending. Nonetheless, monetary policy is an important and necessary to the government and can be utilized to stimulate or discourage spending (AD).
Supply Side Policy
The President and the Congress can together utilize a policy that changes productivity throughout the economy instead of spending. This is called Supply Side Policy. By improving productivity, this policy increases output while keeping price levels the same or even lower. Essentially, it allows producers to generate bigger quantities at a cheaper price. The government may be able to accomplish this directly by engaging in public sponsored and supported research. This would seek to unveil factors that raise productivity or may encourage the private sector to invest in research and development that result in better productivity. Typically, the government expenditures on the supply side include public funding of education. Education and technology are also characterized by a better productivity and are presumed to go hand in hand.
What is more, the government can also use decreases in taxes or subsidies to encourage the private sector to invest in research and development that will improve productivity. The Laffer curve analysis that presumes that taxpayers work harder and are more productive at lower tax rates demonstrates this private sector supply side effect. Evident changes in the Real Gross Domestic Product from either the supply side or fiscal or monetary policies will also bring environmental impacts and influence the quality of life.
It is apparent that all economic policies (fiscal, monetary, and supply side) cause changes in the macroeconomic variables with regard to unemployment, Consumer Price Index, and Real Gross Domestic Product. These variables are measurements of the allocation of resources in the economy. Changes in the macroeconomic variables influence the combinations of the prevalent economic conditions. The higher rates of inflation widen the gap between the rich and the poor. This is because the poor are trapped by fixed income and wages see their purchasing power erode faster than that of wealthier classes. A slower or even a negative growth in the Real Gross Domestic Product causes less income and loss of jobs for most population. It is worth noting that all three economic policies should be utilized to maximize satisfaction and happiness emanating from the Real Gross Domestic Product, employment, and inflation while allowing acceptable environmental impacts.