Posts tagged monetary

How can Monetary Policy help people represented by Silver Cougars?

Angela Soracco of Silver Cougars of America has sent a letter quite concerned about the current inflation of 9%. Silver Cougars of America is an organization of senior citizens and they are being heavily relaint on Social Security day by day. How can the government implement monetary policies to help old seniors to lay off the inflation burden?

There are two ways to control the inflation. First is to increase the interest rate and second is to cut down the money supply on the market. First of all, by increasing the interest rate, many people will tend to save their money and not spend. This will lower the demand-pulled inflation to some degree. Also, by cutting down the money supply flowing through the market, the value of the currency will go up and therefore it will lower the inflation rate.

Nonetheless, there is one serious drawback to this policy. It will aggravate the negative economic growth and skyrocket unemployment rate in return. So, there is a trade off. Governments would look at the opportunity costs of implementing this policy and consider whether it will be worth of a try or a bad choice.

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Intro to Macroeconomics

Today in the class, we have learned simple diagrams about the economic transactions between firms and households. As you see in the diagram, the households provide factors of production (FoP) to the firms. Firms gives wages or rent for the factors of production provided by the households. The firm then provides the service or good by using these factors of production to the households. The households in reture gives payment to the firms for the service or the good.

We have learned about several economic terms such as GDP. GDP means Gross Domestic Product and it is the Total Value of all Spending in an Economy. It is the Total Value of all final Goods and Services in an Economy regardless of who owns the productive assets.

Unlike GDP, GNP encounters for the total income earned by a nation’s factors of production regardless of where the assets are located. For example, lets say that there is one British businessperson doing business in Japan. His buisness is part of Japan’s GDP, but it is not part of Japan’s GNP. It is the part of UK’s GNP.

GDP per capita is GDP divided by population of that country. It is often used to show how much wealth each person has. However, there is one flaw with this index. If there is a huge disparity between the rich and the poor, like in United States, this value means less compared to when there is less disparity between rich and poor. According to Ms. Q in the class, only 1% of United State’s population owns 49% of financial wealth. So, GDP per capita is not always accurate.

GDP per capita is often used to evaluate one country’s standard of living, however, as it was stated, it is not always accurate. For example, there could be several trillionares and billions of poor in a country. As an alternative, many scholars use HDI to evalute standar of living of countries. It encounters for life expectancy, literacy rate, education, public health system, and etc. It looks at the different point of view compared to GDP per capita. According to the lecture today, Cuba has less thant 5000$ per capita, however, it has almost 100% literacy rate, which shows that it has high standard of living.

Extra Info: GDP can vary according to the country’s currency exchange rate to USD. As GDP is in US dollar, other foreign countries have to convert their currency to USD. For example, if the exchange rate goes down (value: Foreign currency<USD) the total GDP of the nation decreases. On contrary, if the exchange rate goes up, the total GDP of the nation increases dramatically. So this is one drawback to GDP.

There is an economic index called PPP that covers up the problem of GDP. “Purchasing power parity exchange rate is the exchange rate based on the purchasing power parity (PPP) of a currency relative to a selected standard (usually the United States dollar)” (wikipedia.org) So it gets rid of the exchange rate drawback of GDP and gives more reliable data. However, there is one problem with this also. It is very difficult to measure the differences in quality of goods.

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