Week One

DQs & Responses

DQ 1: Why is economics considered a social science? What role does economics
play in your personal and professional lives?
Economics is considered a social science ecause of the !ay that it uses
scienti"c methods to uild theories that aid in the e#planation of human ehavior in
$roups% or$ani&ations% and on an individual asis' Economics is the scienti"c study
of the use% o!nership% and e#chan$e of scarce resources' (t attempts to e#plain
economic ehavior !hich arises !hen scarce resources are e#chan$ed' )nlike
chemists and iolo$ists !ho can perform controlled e#periments% economists must
rely on oservation and deduction% and the construction of astract models' *ocial
sciences have ecome e#tremely speciali&ed over the last 1++ years% ranchin$ o,
into di,erent types of economics such as pure economics% applied economics%
industrial economics% "nancial economics% and more- each ein$ linked y ho! and
!hy the e#chan$e takes place% ho! the e#chan$e creates ene"ts and costs for the
participants% and the attempt to understand this'
DQ .: What is the di,erence et!een real and nominal /D0? Does /D0 accurately
re1ect the nations !elfare? Why or !hy not? 2o! can a countrys /D0 e
manipulated? (n your opinion% is the )'*' /D0 ein$ manipulated? E#plain your
ans!er'
3s ( understand it% Real /D0 is the market value of "nal $oods and services
produced in an economy% stated in the prices of a $iven year' Real /D0 can also e
4ominal /D0 ad5usted for in1ation' 4ominal /D0 is calculated at e#istin$% or
current% prices' ( !ould like to think that /D0 does accurately re1ect a nations
!elfare' (f you are lookin$ at it statistically% you can revie! the 1uctuation of an
economy over several years and% ased on the reports% determine if the current
state of the economy has improved or declined' 6he countrys /D0 can e
manipulated in more than one !ay' ( actually !asnt a!are of this efore today ut
one !ay that a country can manipulate their /D0 is y alterin$ ho! they list thin$s'
7or e#ample% ( 5ust read that the )'*' is $oin$ to chan$e in these !ays: research and
development !ill e counted as a capital investment instead of as a cost of makin$
$oods- investment in artistic ori$inals like ooks% 68 sho!s and movies !ill e
counted as "#ed investments- money that pension plans promise to pay retirees !ill
e counted as !a$es' 4o! pendin$ the situation% the country% and the function of
the 9"rm: that is ein$ chan$ed% this could e a manipulation of the facts that
!ould then cause the /;0 to e manipulated' ( honestly do not have an opinion as
to !hether not the )'*' /D0 is ein$ manipulated or not% until no! ( have never
thou$ht aout it nor looked into it and ( !ould honestly !ant to research it then sit
do!n and discuss it !ith my parents so that ( could $et a etter feel for it and
determine !hat my opinion !ould e'
DQ <: (dentify economic factors that a,ect the real /D0% the unemployment rate%
the in1ation rate% and a key interest rate' 2o! do you predict the economy !ill
perform in the ne#t t!o years $iven the current state of t!o of the economic factors
you identi"ed? 2o! mi$ht your or$ani&ation e a,ected y these chan$es?
Well% my or$ani&ation !ill not e a,ected y any chan$es as ( do not have an
or$ani&ation- ( am solely a student at the moment' (m $oin$ to choose the
unemployment rate and the in1ation rate as my t!o economic factors' (n Octoer
of .++= the )'*' )nemployment rate hit in mind lo!in$ 1+> and has almost
steadily een trendin$ do!n!ard since' ?urrently% the unemployment rate is @'<>
accordin$ to the ureau of laor statistics' 0lease keep in mind that if there is a
mathematical eAuation or process that is kno!n for forecastin$% ( am una!are of it
and used my o!n process in an attempt to forecast !hat the unemployment rate
!ill e t!o years from no!' ;ased on my calculations the unemployment rate
should drop to B'=> y this time .+1@' ( tried to use the ureau of laor statistics
!e site to learn aout the in1ation rate and "nd myself lost' (f ( !ere to ase my
ans!er or prediction% of ho! the economy !ill perform in the ne#t t!o years% solely
on the unemployment rate ( predict the economy !ill slo!ly improve over the ne#t
t!o years'
Week 6!o
DQs & Responses
DQ 1: E#plain the vie!points of classical and Ceynesian economists' 2o! did the
economy that e#isted at the time of these theories in1uence them? Which theory is
more appropriate for the economy today? Why?
Well to e$in% classical economists focus on the lon$Drun prospects of the economy
and actually avoided discussin$ the shortDrun prospects% after the depression of the
1=<+s Ceynesian economists !ere invented ended their focus lay only on the shortD
run prospects of the economy' ?lassical economists elieve that shortDrun prolems
!ere only temporary the $litches and that the market should e left alone as it is
self re$ulatin$ throu$h the invisile hand' Ceynesian economists !ere orn durin$
the 1=<+s depression ecause of the classical economists theories% their lack of
focus on shortDrun prospects of the economy% their inaility to e#plain the cause of
the depression% and their inaility to end the depression' ( !ould think in order for
an economy to operate smoothly and ene"cially% and that oth theories are
necessary' We need to e ale to plan for oth short term and lon$Dterm for
multiple reasons- !e need the lon$Drun ecause !e need to kno! !here our
economy is headed and make sure our policies and plans lead economic $ro!th% !e
need the shortDrun to ensure !e do not fall into another depression'
DQ .: (n your opinion% !hich t!o determinates currently have the $reatest impact
on a$$re$ate demand and supply? Eustify your response !ith an e#ample'
3$$re$ate supply determinants are held constant !hen the a$$re$ate supply
curves are constructed' 3 chan$e in any of these determinants causes a shift of
either the shortDrun a$$re$ate supply curve% the lon$Drun a$$re$ate supply curve%
or oth'
6he assortment of a$$re$ate supply determinants fall into three cate$ories
F1G resource AuantityDDthe amounts of laor% capital% land% and entrepreneurship
availale% F.G resource AualityDDthe productivity of the four factors of production% and
F<G resource priceDDthe prices of the inputs used in production' While a complete list
is Auite len$thy% there are four speci"c determinants% or factors% that stand out
!hen studyin$ macroeconomics and a$$re$ate market' 6hey are:
Wa$es: 6his is the price of laor% !hich !orks throu$h the resource price
determinant' (t is the key determinant underlyin$ the selfDcorrection mechanism of
the a$$re$ate market' Wa$es a,ect the shortDrun a$$re$ate supply curve% ut not
the lon$Drun a$$re$ate supply curve'
6echnolo$y: (mprovements in production techniAues% often emodied in product
inventions and innovations% is a prime e#ample of a resource Auality determinant'
6echnolo$y causes shifts in oth the shortDrun and lon$Drun a$$re$ate supply
curves'
Ener$y 0rices: 6hese are the prices of key ener$y inputs% especially petroleum% that
are essential to any modern industriali&ed economy' Hike !a$es% ener$y prices also
!ork throu$h the resource price determinant' 3lso like laor% ener$y prices a,ect
the shortDrun a$$re$ate supply curve% ut not the lon$Drun a$$re$ate supply curve'
?apital *tock: 6his is the total Auantity of capital used y the economy for
production' (t is a prime e#ample of a resource Auantity determinant and a,ects
oth the shortDrun and lon$Drun a$$re$ate supply curves'
DQ <: What is the di,erence et!een contractionary and e#pansionary "scal
policies? Which is more appropriate today? E#plain your ans!er' 2o! mi$ht
contractionary and e#pansionary "scal policies a,ect your or$ani&ation?
Well a "scal policy is the delierate chan$e in either $overnment spendin$ or
ta#es to either stimulate more slo!do!n the economy' E#pansionary "scal policy
shifts the 3D curve out to the ri$ht !hile contractionary "scal policy shifts the 3D
curve to the left' 3n e#pansionary policy increases the money supply and
decreases the interest rate !hile a contractionary policy decreases the money
supply and increases the interest rate' ( !ould almost think that 9!hich is more
appropriate today?: is a rhetorical Auestion' (n my uneducated opinion% our
economy is in need of money so ( !ould say an e#pansionary policy is in need'
3lthou$h ( do not have an or$ani&ation that !ould e a,ected y either policy% any
or$ani&ation !ould e a,ected y either' 3n e#pansionary policy ( !ould think
!ould ene"t an or$ani&ation% its increasin$ the supply of funds and decreasin$ the
interest rate% asically increasin$ in or$ani&ations options and savin$ them money
on any pree#istin$ "nancial oli$ations' 3 contractionary policy could e ene"cial
to an or$ani&ation dependin$ their industry% if the or$ani&ation provides loans in the
interest rate rises then their pro"ts !ould increase'
What !ere at least t!o of the more challen$in$ concepts and ideas covered in Week
One?
(m not sure if it is the information that !e are learnin$ or the ne! formatIlayout of
our classroom ut so far this has een the most diJcult class ( have e#perienced in
a lon$ time' 7or me it !asnt so much the e#planation of the economic interaction
of resources amon$ households% $overnment% and usiness% it !as tryin$ to $rasp
the concept is a !hole' 3lso% ( can comprehend the description of the $ross
domestic product% in1ation rate% unemployment rate% and interest rate% ( tried to
$ain a etter understandin$ of these in real time Fy $oin$ to the ureau of laor
statisticsG% and ended up only feelin$ confused% frustrated y the !esite% and
some!hat over!helmed y the thou$hts of !hat lies ahead in this class'
Week 6hree
DQs & Responses
DQ 1: What are the uses of money? 2o! do commercial anks and 7ederal anks
create money? (s monetary policy conducted independently in the )nited *tates?
E#plain your ans!er' (s it important for monetary policy to remain independent from
all parties? Why or !hy not?
2onestly% if you think aout it% money is nothin$ more than a piece of paper'
6he fact that it serves as a medium of e#chan$e or unit of account is !hat $ives it
its !orth% it serves as a medium ecause it is universally accepted in the e#chan$e
for $oods and services% thus makin$ it a liAuid asset' Without money !e !ould e
ack in the times of arterin$ $oods and services for other $oods and services'
Koney is a unit of account ecause it is referenced !hen calculatin$ ones
purchasin$ po!er versus the value of $oods and services% and has no intrinsic
value'
;anks% !hether commercial or 7ederal are "nancial institutions' 6hey create
money ecause they orro! from 0eter to loan to 0aul and char$e 0aul interest on
0eters money'
Konetary 0olicy is conducted in the )nited *tates% y the )'*' ?entral ;ank
and the 7ederal Reserve ;ank F!hich is actually not part of the $overnmentG' 6he
7ederal Reserve ;ank has 1. re$ional anks and is fairly independent' (t is
important for Konetary 0olicy to remain independent from all parties' 6his !ould e
to prohiit the political pressures and ias and allo! them to focus on the issues at
hand and "nd resolutions'
DQ .: What is the di,erence et!een contractionary and e#pansionary monetary
policy? What is the intention of each policy under a depression% recession% or roust
economy? Which type of monetary policy is more appropriate today and !hy?
Each Konetary 0olicy !as created and implemented to serve a di,erent purpose' 3
contractionary Konetary 0olicys aim is to decrease the supply of money and
increase interest rates% !hereas E#pansionary Konetary 0olicy increases the money
supply and decreases interest rates' With a ?ontractionary Konetary 0olicy% the
a$$re$ate demand curves shifts to the left% prices drop as output increases' With an
E#pansionary Konetary 0olicy the a$$re$ate demand curve shifts to the ri$ht as
output decreases and prices rise' 6he intention of each Konetary 0olicy is to either
suppress or stimulate the economy' (n todays economy it seems like the
E#pansionary Konetary 0olicy is more appropriate' ( say this ecause the
$overnment had een providin$ relief and support to the economy for some time
no! and interest rates are stayin$ relatively lo!% so ( think no! e the appropriate
time to counteract any potential repercussions of providin$ stimulus for such a lon$
period of time'
L3nother Response
6he di,erence et!een the contractionary and e#pansionary monetary policy is
that they decrease and increase the supply of availale money !ith our economic
structure% respectively' Konetary policies are the $overnments approach to makin$
ad5ustments durin$ periods of in1ation and recession throu$h the use of our
countrys central ankin$ system% the 7ederal Reserve *ystem F7R*G- also kno!n as
9the 7ed': 6he 7ed uses three primary methods of controllin$ the money supply' 3s
;yron pointed out in our $roup DQ in !eek 1 these are done via openDmarket
operations% the discount rate% and reserve reAuirements' ( think !e may not e
completely out of a recession or in a period of in1ation% so (m thinkin$ that an
e#pansionary monetary policy !ould e more appropriate to stimulate the economy'
6his !ould increase the amount of availale monies to consumers and usinesses to
encoura$e more spendin$% !hich ( think !ould cause usinesses to e ale increase
!a$es% production% and employ more people' With more money availale to
consumers they can enhance their Auality of life and usinesses can enhance their
respective or$ani&ational environments'

?olander% D' ?' F.++MG' Economics FN ed'G' 4e! Oork: Kc/ra!D2illI(r!in'
*olomon% K' R'% 0oatsy% K' 3'% & Kartin% C' F.++=G' ;etter ;usiness F1 ed'G' )pper
*addle River: 0rentice 2all'
DQ <: Rank the factors that contriute to the discount interest rate from most
important to least important' Eustify your rankin$s'
Week 7our
DQs & Responses
DQ 1: 2o! does a $overnment ud$et de"cit a,ect the economy? (dentify t!o
periods in recent history in !hich the )nited *tates has run ud$et de"cits' What
!ere the reasons for the de"cits durin$ those time periods?
6he de"cit decreases economic $ro!th% income% and savin$s' When the
$overnment incurs a de"cit it must sell its onds' ;onds are !hat the $overnment
uses as a !ay to "nance the de"cit' ;asically% !hen the 7ED provides a loan to the
$overnment% it does so y purchasin$ onds' What it reaks do!n to is !hen the
$overnment provides a ond to the 7ED% the 7ED then in turn simply prints more
money' 6his causes in1ation and reduces the value of a dollar'
6here are plenty of years to choose from in !hich the $overnment has incurred a
de"cit in the ud$et' *ince .++1 the ud$et has een in a severe decline' 6he
de"cit e$an in .++. of a hefty P1QM illion and y .++B had more than douled
ecomin$ a !hoppin$ PB1. illion de"cit' 3n increase in spendin$ and !ithout an
increase in ta#es is 5ust one of the causes of the de"cit' (t is elieved that risin$
healthcare costs are the i$$est factor of current and future de"cit issues ecause
of the ay oom $eneration reachin$ retirement a$e and the e,ects of this on the
economy'
DQ .: What are the potential conseAuences of a country havin$ a lar$e overall
det? (f you !ere in the position to implement a solution for the countrys lon$Dterm
det% !hat !ould it e and !hy?
(f a country has a lar$e overall det the possile repercussions could e a
decreased standard of livin$ coupled !ith a ad economy' 6hese repercussions
could% in turn% causin$ more prolems for citi&ens such as crime% dru$s% famine% and
!ar% amon$st other thin$s' When $overnment funds are close to depleted the
$overnment e$ins seekin$ !ays to replace those funds' 6his is the reason that
fundin$ is cut for $overnment pro$rams% implemented to aid in lo! income families
in otainin$ thin$s such as food% shelter% healthcare% etc' 6his e$ins a domino
e,ect' 6he families that !ere receivin$ this aid !ill no! have to "nd another !ay to
feed the family% even if it means committin$ a crime' 4o! !e have a $overnment
!ith no money% thousands of families forced to help themselves y !hatever means
necessary% and ecause of that !e no! have a nation in turmoil- !hich also $ives
the nations a ad reputation' 3ny country !ith a reputation for petty theft is not
$oin$ to e entertainin$ many tourists% thus decreasin$ the nations revenue' (f a
country !ere to maintain such a state for an e#tended period of time either the
$overnment !ill crumle or it !ill e conAuered y another countrys $overnment'
Well in order to accurately say !hat ( !ould do if ( !ere in the position to
solve the countrys lon$Dterm det% ( !ould "rst have to look at all the details' (n
my opinion% !ithout havin$ all the facts in front of me !ith every pro$ram and every
option asically on the choppin$ lock ( could not tell you e#actly !hat ( !ould do' (
could ho!ever descrie !hat my overall demeanor !ould e and a va$ue course of
action' 6he very "rst step that ( !ould take is all political positions !ould take a pay
cut% it !ould not matter !hat part of the $overnment% le$islature% ?on$ress% etc' you
!ork for% if you are $rossin$ over P1++%+++ per year e#pected to take a pay cut'
4o! ( am assumin$ that this opportunity for me to create a solution !ould also
mean that ( am the president% so ( !ould also $ive myself a pay cut' 3fter ( "nish
slicin$ and dicin$ all politicians and $overnment oJcials salaries ( !ould revie! all
pro$rams% processes% events% etc' that receive $overnment fundin$ and ( have to
admit any forei$n aid provided y our $overnment !ould cease to e#ist' ( !ould
also look to our armed forces and their activities% and if necessary remove them
from any forei$n countries' 4e#t ( !ould try to stimulate our economy and "nd a
!ay to create 5os% maye try to stimulate production' Once production picks up (
!ould e$in ta#in$ usinesses% these monies !ill e used to fund pro$rams that are
desi$ned to aid usinesses and keep them open' 6o help families in need ( !ould
open 7ood ;anks all over the country that !ould provide food t!ice a month% ut (
!ould not provide a cash stipend or any type of food stamp pro$ram'
( think% !ithout the speci"cs in front of me% that !ould e a $ood start in
shapin$ a healthy nation and economy'
DQ <: What are the positive and ne$ative aspects of ud$et de"cits and surpluses?
What policy is est for todays economy? E#plain your ans!er'
;ud$et surpluses and de"cits are the result of policy choices re$ardin$
$overnment spendin$ and ta#es' 3 ud$et surplus can have oth positive and
ne$ative e,ects- it 5ust depends on ho! the $overnment decides to use the money'
3 ud$et surplus occurs !hen the $overnment receives more money i'e' revenue
and ta#es% than ori$inally anticipated via the ud$et' 6his can happen for various
reasons% there may have een ud$et cuts% !hile all the ta#es that fund the ud$et
!ere already collected% creatin$ a surplus of funds' 3 ud$et surplus increases
national savin$s% creates more money availale for lendin$% reduces interest rates%
and stimulates investment' When this occurs the $overnment can eliminate
outstandin$ det% $ive individuals and usinesses additional money y refundin$
the surplus funds to ta#payers% or use the surplus funds on other thin$s such as ne!
domestic pro$rams% improved infrastructure% or additional defense spendin$- it 5ust
depends on !here policymakers decided to allocate the funds' 6o me the most
positive or ene"cial option !ould e to eliminate all or part of the national det' 3
ud$et surplus increases the value of the dollar% decreases interest rates% and
increases uyin$ po!er' 3 ne$ative aspect !ould e that a ud$et surplus slo!s
the economy' ( !ould think another e#ample of a ne$ative aspect of a ud$et
surplus !ould e !hile ?linton !as in oJce he !as ale to create a surplus% !hen
the ;ush took oJce he sAuandered the surplus and e$an to run a de"cit'
(f the $overnment is runnin$ a ud$et de"cit it means that theyre spendin$
too much and not rin$in$ in enou$h money from ta# revenues' 6his means it has
to orro! the funds to cover the $ap et!een the total ta# revenue and the ud$et'
6his can happen due to increases in $overnment spendin$ on thin$s such as the
country $oin$ to !ar% increases in 2ealth ?are% education% transport% and defense or
due to a !eaker economy' 6his can also occur !hen ta# revenues fall short of the
initial forecasts' 6he positive aspects of runnin$ a ud$et de"cit are only possile if
policymakers allocate funds appropriately' 3 ud$et de"cit can have positive
macroeconomic defects in the lon$ run if it is used to "nance e#tra capital spendin$
that leads to an increase in the stock of national assets' 3 cost ene"t analysis can
e used to estimate the social ene"ts of increased capital spendin$' Runnin$ a
ud$et de"cit could e vie!ed as: an increase in orro!in$ can act as a stimulus to
demand !hen other sectors of an economy are su,erin$ from !eak spendin$' (t
has een ar$ued that the $overnment should use "scal policy to keep a real
national output closer to potential /D0 to one !ay and a lar$e ne$ative output $ap
ecause maintainin$ a hi$h level of demand helps to sustain $ro!th and keep
unemployment lo!' 3s for the ne$ative aspects of runnin$ a ud$et de"cit% for
starters it has to e "nanced' Even if ta#es are not increasin$ no!% if the $overnin$
continues runnin$ a de"cit and increasin$ our national det !hich !e pay interest
on% ta#es !ould eventually need to e increased- this !ould not only place a heavy
urden on future ta#payers ut it !ould also cripple millions of households and
private sector usinesses spendin$' We have een runnin$ a de"cit since the late
1==+s% ima$ine all of those payments made and ho! much interest has een paid
and all the etter causes those funds could have een spent on' Hastly% !asteful
pulic spendin$% neoDlieral economists elieve that hi$her spendin$ in the state
sector is a !aste and that a risin$ share of /D0 taken y the state sector has a
ne$ative impact on the $ro!th of the private sector of the economy'
Week 7ive
DQs & Responses
DQ 1:
DQ .:
DQ <: