Chapter 35

Chapter 35 discusses the Phillip curve which describes the negative relationship between inflation and unemployment.  When aggregate demand is expanded, policymakers can select a spot on the Phillip curve higher inflation and lower unemployment. Policymakers can also do the opposite, contracting the aggregate demand and selecting a point with lower inflation and higher unemployment. Thus, through this operation, one can see that there is a trade off between inflation and unemployment. However, this conclusion only holds in the short run. In the long run, the expected inflation adjusts to what occurs in the actual inflation. Thus, the long run curve is vertical at the point of natural rate of unemployment. Changes in aggregate supply can also shift the Phillips curve. An adverse supply change gives policymakers a worse trade off than before between inflation and unemployment. They have to accept a higher rate of inflation for any given rate of unemployment or higher unemployment rate for any given inflation rate. In essence, it becomes out of the policy makers' hands and they have to decide based on what they are given. If the Fed decreases growth in the money  supply to reduce inflation, the economy moves along the short run Phillips curve. This results in temporarily high unemployment. The cost to deflate the economy depends on how fast the expectations of inflation fall.

Chapter 34

Chapter 34 discusses the effect of fiscal and monetary policies on the aggregate demand of an economy. Keynes developed a theory for the short run fluctuations called the the theory of liquidity. This theory explains how interest rates are determined. The interest rates adjust in order for the supply and demand for money to be in an equilibrium. When the price level increases, the money demanded increases due to dollar depreciation and interest rates rise. The higher the interest rate, the  less investment and vice versa. The downward slope of the aggregate demand shows the negative correlation between the price level and the quantity of money demanded.  Policymakers influence the aggregate demand by making monetary policies. These policies cause fluctuations in monetary value. When the money supply is increased, the interest rate equilibrium decreases. This decrease in interest rate shifts the aggregate demand curve to the right.  Decrease in money supply shifts the aggregate demand curve to the left. Fiscal policies can also effect the aggregate demand of an economy. When there is an increase in government purchases or a cut in taxes, the aggregate demand curve shifts right. A decrease in government purchases or increased taxes shift the aggregate demand curve to the left. When the government changes either spending or taxes, the shift in the aggregate demand caused by this can be either smaller or larger than the fiscal change. However, the crowding out effect usually dampens the effect of fiscal policies on demand.

Chapter 33

Chapter 33 begins with the concept of the business cycle, which is the fluctuations in the economy. The fluctuations are caused by recessions or depressions, depending on the severity. Depressions are far worse and uncommon compared to recessions. The real GDP is the most used source to monitor the business cycle's fluctuations. However, fluctuations are still very unpredictable. The classical economic theory states that nominal variables like money supply and price do not effect the real variables such as employment and outputs. However, the flaw of this theory is that is mainly accurate for the long, not short run. Instead, an aggregate supply and demand model is used for the short run. In this model, the supply and demand level out to a balance. The aggregate demand slopes downward because lower price levels increase the money in households that increases spending and lower prices reduce the demand for money so as money is put into assets, interest rates fall, stimulating spending in investments. The final reason is that lower price levels reduces interest rates, depreciates the dollar in  the foreign currency market, increasing the net exports. Policies that increase consumption, government purchases, investment, or net exports increases aggregate demand. Anything that reduces these things has the inverse affect, reducing the aggregate demand. The long run aggregate supply curve is vertical. The supply relies on the labor, capital, natural resources and technology. Three theories are considered for the reason the supply curve slopes upward. Things that change the economy's ability to produce products shift the short term aggregate supply curve and may shift the long term one as well

Chapter 32

Chapter 32 focuses on the market for loanable funds. One of two markets, the other being the market for foreign exchange. To begin and aid with explaining, one can look to the previous equation, savings equals domestic investment plus net capital outflow. In foreign market exchange, the real exchange rate adjusts to balance the supply of dollars and the demand of dollars. Since net capital outflow effects both the loanable funds market and the foreign currency exchange market, it is the variable that connects the two markets. Government policies that reduce national saving such as government budget defect reduces the supply of loanable funds while  increasing the interest rate. This higher interest rate reduces net capital outflow, which then reduces the supply of dollars in the market for foreign exchange The dollar's appreciation causes the next exports to fall as prices for exchanging to dollars go up for foreigners so they buy less goods and services. Tariffs and trade quotas help balance trade, however they do not always work one hundred percent of the time. Trade restrictions increase net exports which then increases the demand for dollars in the foreign currency exchange market. This causes the value of dollars to rise compared to the value of foreign goods. This effect causes an offset in the initial impact of trade restrictions on next exports. If for any particular reason, investors that invest in another country change their opinions and thoughts, it could cause serious changes to that country's economy.  Political instability can lead to capital flight, or the removal of foreign investments, which increases interest rates and depreciates the currency

Chapter 31

Chapter 31 discusses the macroeconomics of open markets. Next exports are the value of the domestic goods and services that are sold outside of the original nation that produced them, minus the foreign goods and services that are brought into and sold in the nation. Net capital outflow is the purchasing or acquiring of foreign assets by the domestic residents of the nation minus the purchasing or acquiring of domestic assets by foreigners. Due to the fact that every transaction is the exchange of an asset for a good or service, a nation's net capital outflow is always equal to its net exports. Considering an economy's saving can be used two ways, those being financing investments at home and buying assets abroad, national savings is domestic investment plus net capital outflow. The nominal exchanges rate is the relative price of the currency of two nations while the real exchange rate is the relative price of the goods and services of the two nations.  When nominal exchange rates change so that each dollar buys more foreign currency than previously, then the dollar is appreciating, or gaining value. When the nominal exchange rate for one currency to another decreases, than the dollar is depreciating in value. The theory of purchasing power says that the dollar should be equivalent in purchasing power to those dollars of all other countries. The theory also states that the nominal exchange rate between two countries should also reflect the price level in the two countries.

Chapter 30

Chapter 30 shifts from money, to discussing money growth and inflation. In general, prices in an economy adjust to the equilibrium between money supply and money demand. If the federal reserve increases the supply of money, consequently, inflation increases as well. Nominal variables are measured in monetary units while real variables are measured in physical units. When the money supply is changed it changes the nominal variables not real variables. Monetary neutrality is believed by most to predict the behavior of the economy in the long run. Studies of monetary change on the two variables backs the belief. Money neutrality is the belief that changes in the quantity of money does not effect the real variables. Governments can print money to pay debts, however this leads to hyperinflation. The fisher effect is that when inflation rises, nominal interest rises by the same amount. Inflation does not necessarily make someone poorer because nominal incomes increase at the same rate as well. When governments create money, they gain revenue called inflation tax. Inflation tax is basically a tax on every person in the economy who has money. The velocity of money is the rate at which money is moved between holders and is calculated with the equation of price times quantity of output, divided by the quantity of money. Classical dichotomy is the theoretical difference between the two variables, real and nominal.

Chapter 29

Chapter 29 shifts from unemployment to focusing on the monetary system. Money is the set of assets that people use to to buy things from other people. Thus, money is a medium of exchange between buyers and sellers. Store of value are items that a person can use as a way to transfer purchasing power from now to the future. An item's liquidity is how easy it is to convert that asset into the medium of exchange of that economy. There are two types of money, commodity and flat. Commodity money is value that is in the form of a good that has intrinsic value. An example of this is gold. Flat money has no intrinsic value and is used by the government's law. One form of money is currency. Currency is the physical bills and coins. However, currency is not the only money asset. Demand deposits are another form of money assets that depositors of a bank can demand by writing checks. The federal reserve has 2 main jobs. The first being the regulation of banks and the health of the banking system. The second is the control of money supply, which is the amount of money available in the economy. Decisions made by the central bank are monetary policies. Reserves are deposits that banks contain, but do not loan out to others. If they were to hold all deposits in the reserve, then they would not influence the supply of money. Fractional reserve banking is the system in which banks hold only a small portion of the deposits as reserves. The amount of deposits it holds as reserves is called the reserve ratio.