Chapter 32

Chapter 32 talks about the causes of macroeconomic variables (like net exports, net capital outflow, and real/nominal exchange rates) and how they are related to each other. The first topic is of two markets and their supply and demand. These markets are the market of loanable funds and the market for foreign currency exchange. The market of loanable funds' supply curve is derived from national saving meanwhile the demand curve is derived from domestic investment and net capital outflow. At the equilibrium interest rate, the amount that people want to save exactly balances the desired quantities of domestic investment and net capital outflow. The market for foreign currency exchange's supply curve is derived from net capital outflow, meanwhile its demand curve is derived from net exports. The important determinant of net capital outflow is the real interest rate, as was said in the previous chapter. There's a negative relationship between interest rate and net capital outflow. A budget deficit reduces the supply of loanable funds which then increases the real interest rate and reduces net capital outflow. That decrease in net capital outflow reduces the supply of dollars to be exchanged into foreign currency which causes the real exchange rate to appreciate. Trade policies don't affect the trade balance. This is because they don't change national saving or domestic investment. Free trade allows everyone to be better off because everyone specializes in their what they are best at. However, trade barriers/restrictions block these gains from trade and reduce the overall economic well-being, which is why economists usually oppose trade policies. Capital flight is a big and sudden reduction in the demand for assets in a country. 

Chapter 31

Chapter 31 is about open economies, which means there's free trade and interactions between multiple economies. Economies interact in an open economy by buying and selling goods in world product markets and by buying and selling capital assets like stocks and bonds. Balanced trade occurs if exports equals imports. Net exports are the value of a country's exports minus the value of a country's imports. Net capital outflow equals the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners. Foreign direct investment differs from foreign portfolio investment because the former actively manages the investment while the latter has a more passive role. Net capital outflow equals net exports. National saving equals Y -C -G. Saving, investment, and international capital flows are all linked and entangled. Saving equals domestic investment plus net capital outflow. The nominal exchange rate is the rate where a person can trade the currency of one country for the currency of another. Appreciation of currency strengthens because it can buy more foreign currency. Currency weakens when it depreciates. The real exchange rate depends on the nominal exchange rate and on the price of goods in the two countries measured in local currencies. Purchasing -power parity is a theory that a unit of currency must have that same real value in all the other countries. If the purchasing power of the dollar is always the same at home and elsewhere, then the real exchange rate can't change. The nominal exchange rate between the currencies of two countries must reflect the price levels in those countries. The theory of purchasing- power parity isn't completely accurate because many goods are not easily traded and even tradable goods aren't always perfect substitutes when produced in different countries.

Chapter 30

Chapter 30 discussed inflation and its causes/ effects. Inflation is the increase in the overall level of prices. Deflation is long periods where most prices fell. Hyperinflation is an extraordinarily high rate of inflation. When the overall price level rises, the value of money falls. In the long run, the overall level of prices adjusts to the level at which the demand for money equals the supply. At the equilibrium price level, the quantity of money that people want to hold exactly balances the quantity of money supplied by the Fed. The equilibrium of the money supply and money demand determines the price level and the value of money. Classical dichotomy is the theoretical separation of nominal and real variables. The difference between real and nominal variables is that real variables are measured in physical units, while nominal variables are measured in monetary units. To calculate the velocity of money, the equation V= ( P X Y ) / M. The quantity theory of money states that growth in the money supply is the primary cause of inflation. The inflation tax is like a tax on everyone who holds money. The Fisher effect is the one-for-one adjustment of the nominal interest rate to the inflation rate. The Fisher effect is a long-run perspective because inflation is unexpected and can't therefore be held in the short-run. Inflation does not in itself reduce people's real purchasing power. Shoeleather costs are the resources wasted when inflation encourages people to reduce their money holdings. The six costs of inflation are: shoeleather costs (reduced money holdings), menu costs (more frequent adjustment of prices), increased variability of relative prices, unintended in tax liabilities, confusing from changing unit of account, and arbitrary redistributions of wealth between creditors and debtors.  

Chapter 29

Chapter 29 talks about the monetary system. Money is the set of assets in the economy that people regularly use to buy goods and services from other people. Money has three functions in the economy: medium of exchange, unit of account, and a store value. Commodity and fiat are two kinds of money. Intrinsic value means that the item would have value even if it were not used as money. Money stock for the US economy includes currency and deposits in banks/other financial institutions that can be easily accessed to buy goods and services. The Federal Reserve was created in 1913 to ensure the health of the nation's banking system. The Federal Reserve System is made up of the Federal Reserve Board in D.C. and twelve regional Federal Reserve Banks across the country. The Fed has two jobs: regulating the banks/ ensuring the health of the banking system and controlling the quantity of money that is made available. The second job is considered more important than the first. Deposits that banks have received but have not loaned out are called reserves. Since all deposits are help as reserves, in this imaginary economy, the system is called 100 percent reserve banking. When banks hold only a fraction of deposits in reserve, banks create money. The money multiplier is the reciprocal of the reserve ratio. The higher the reserve ratio, the less of each deposit banks loan out, and the smaller the money multiplier. If banks hold all deposits in reserve, banks do not influence the supply of money. The Fed has three tools in its monetary toolbox: open-market operations (buying/selling government bonds), reserve requirements, and the discount rate. The problems with the Fed's three tools are that the Fed doesn't control the amount of money that households choose to hold as deposits in banks and that it doesn't control the amount that bankers choose to lend.

Chapter 28

Chapter 28 talks about unemployment. It tells us how to calculate the unemployment rate and the labor participation rate. The unemployment rate is calculated as the number of unemployed people divided by the labor force times one hundred. The labor participation rate is calculated as the labor force divided by the adult population times one hundred. It differentiates between employed, unemployed, and not in the labor force. The labor force consists of employed and unemployed people. The natural rate of unemployment is the normal rate at which the unemployment rate fluctuates. Cyclical unemployment is the drifting of unemployment from its natural rate. Women have been starting to have increasing labor participation rates while the men's decreases because more men are becoming stay at home dads while their wives work, and older men retire earlier and live longer. Discouraged workers are people who would like to work but have given up looking for a job. With regard to minimum wage laws, if the wage is kept above the equilibrium level, the result is unemployment. Unemployment is an imperfect measure. One reason unemployment exists is because of how long it takes for people to find a job that suits their interests and skills. Another reason is that because of minimum wage laws the resulting surplus of labor symbolizes unemployment. A third reason is the market power of unions because they create a surplus of labor. A fourth reason is the theory of efficiency wages, which states that paying employees higher wages increases worker quantity/health and worker effort. Unemployment is not a straightforward problem with simple solution.