Macroeconomics

August 16, 2015

Heather Crabtree
Assignment
Week 7

Chapter 30: Macro Policy Debate: Active or Passive?

10. If the public is expecting public officials to pursue an expansionary
policy, which means that they expect the officials to increase the
money supply in the economy to bring economic growth at the cost
of inflation, then this can put tremendous pressure on the official.
Going against what the public wants is not the way to get elected
and to go against an expansionary policy could lead to deflation
and reduce the supply of money in the economy. This would led to
a decline in economic growth. Government officials whose time in
the office has lead to an economic decline are hardly reelected. So
the expectations of the public would lead to the officials
implementing expansionary policy when they are elected.

11. One problem that makes it difficult for policy makers to decide
whether the economy is operating at its potential output level is
identifying the natural rate of unemployment. There will always
be some level of unemployment existing in the economy, which
makes it difficult to determine whether the economy is operating
at its potential output. Since there is uncertainty in the potential
output level, policies that are made can often be incorrect. If the
potential output is overestimated, they introduce the expansionary
policy pushing aggregate output beyond its potential, fueling
higher prices in the long run but with no permanent reduction in

unemployment. This incorrect estimation leads to an increase in

the expansionary gap and can increase inflation.

12. The short run phillips supply curve reflects the inverse relationship
between the inflation rate and the unemployment rate. The
policy trade off for the short run Phillips supply curve is the
relationship between inflation and unemployment: inflation
increases, employment increases, thus decreasing unemployment
and vice-versa in the other direction. This trade off occurs
because, in the short run, adjustments made to prices and wages
are relatively low. In the long-run, there is no change in
unemployment since it stays at its value of the potential output.
This is a result of a greater adjustment in prices and wages.
Because of this the policy trade off that occurs is that a price
increase leads to an increase in inflation but would leave the
output of the economy the same and thus the unemployment rate.
The long run phillips supply curve location is determined on the xaxis by the unemployment rate. To experience a shift here the
potential output of the economy would have to change, thus
changing the unemployment rate. This could be caused by an
increase or decrease in the productions of raw materials such as
crop production or a drought leading to crop failure.

Chapter 31: International Trade

6. When tariffs or quotas on sugar are imposed on countries that
export sugar, those countries economy will ultimately experience a
net loss. The tariffs or quotas would cause the world price of sugar
to drop since they are restricting the demand for it worldwide. This
will benefit consumers outside the United States increasing their
demand. Now supply exceeds demand in exporting countries and
the loss of the producer will exceed the gain of the consumer and
this creates a net loss for the exporting country.
.
7. The World Trade Organization is the legal and institutional body for
collective debate about international trade and restrictions among its
member countries. It consists of a staff of about 500 economists and
lawyers that help shape policy and resolve trade disputes among
member countries. This allows trade to run smoother and fosters
the multilateral trade market through the use of settling disputes
that would otherwise hold trade up and make it difficult to reach
terms of agreement.