Chapter 32: A Macroeconomic Theory of the Open Economy

Chapter 32 talks about the supply and demand for loanable funds and foreign currency exchange. Supply and demand is balanced by the real exchange rate in foreign currency exchanges. Since net capital outflow is part of demand for loanable funds and supplies the foreign currency exchange, it connects the two markets.

Two markets are central to the macroeconomics of open economies, which are the market for loanable funds and the market for foreign currency exchange. In the market for loanable funds, the real interest rate adjust to balance the supply of loanable funds (from national saving) and the demand for loanable funds (from domestic investment and net capital outflow). The real exchange rate adjust to balance the supply and the demand for dollars in the market for currency exchange. Furthermore, since net capital outflow is part of the demand for loanable funds and the supply for the foreign currency exchange, it connects the two markets.

A policy that reduces national saving such as a government budget deficit reduces the supply of loanable funds and increases interest rate. More interest rate leads to a smaller amount of net capital outflow, reducing the supply of dollars in the market for foreign currency exchange. The dollar therefore appreciates and net exports fall.

Restrictive trade policies are sometimes advocated to alter the trade balance, they do not always have that effect, A trade restriction increases net exports for a given exchange rate and,m therefore, increases the demand for dollars in the market for foreign currency exchange. An a result, the dollar appreciates in value, making domestic goods more expensive relative to foreign goods.

When investors change their attitudes towards holding assets in a country, the effects on the economy can be profound, Political instability can lead to capital flight, increasing interest rates and depreciating the currency.

Chapter 31: The Macroeconomics of Open Market Operations

Chapter 31 talks about the macroeconomics in open economies. Part of these include the market of loanable funds and the market of currency exchanges. Furthermore, trade policy and budget deficits are taken into account.

The two markets central to the macroeconomics of open economies are the market for loanable funds and the market for foreign currency exchange. In the market for loanable funds, the interest rate changes to balance the supply of funds and the demand for funds, coming from national saving and investment, respectively. In the market for foreign currency exchange, the real exchange rate adjusts to balance the supply and demand for dollars. Since net foreign investment is part of the demand for loanable funds and provides the supply of dollars for exchange, it is the variable connecting the two markets.

Trade policies could help reduce national saving. Policies like this, such as government budget deficits, reduce the supply of loanable funds, increasing the interest rate. The higher the interest rate, the lower the net foreign investment, reducing the supply of dollars in the market for foreign currency exchange. The dollar gains values, and exports fall.

Restrictive trade policies such as tariffs or import quotas are shown to alter the trade balance, but do not always have that effect. Trade restrictions increase net exports and demand for dollars in the market for foreign currency exchange. Therefore, the dollar gains more value, making domestically produced goods more expensive. However, the increase in value offsets the impact of trade restriction on net exports.

Chapter 30: Money Growth and Inflation

Chapter 29 is about the causes and costs of inflation (whose primary cause is the increase in amount of money in circulation). More money, more problems. Therefore, in order to maintain stable prices, the central bank must have strict control over the amount of money in circulation, so as not to cause inflation. The overall level of prices in an economy adjusts to bring money supply and money demand into balance., When the central bank increases the supply of money, it causes the price level to rise. Persistent growth in the quantity of money supplied leads to inflation.

The principle of monetary neutrality says that changes in the quantity of money influence nominal but no real variables, also, most economists believe that monetary neutrality describes the economic behavior in the long run.

A government can pay for its spending by printing money, which leads to an inflation tax. This can lead to hyperinflation.

The Fisher Effect is an application of the principle of monetary neutrality because when the inflation rate rises, the nominal interest rate rises by the same amount.

Many people think that inflation makes them poorer but inflation not only increases the cost of what they buy but also the nominal incomes.

There are six costs on inflation shoeleather costs associated with reduced money holdings, menu costs associated with more frequent adjustment of prices, increased variability of relative prices, unintended changes in tax liabilities due to non indexation of the tax code, confusion, and inconvenience resulting from a changing unit of account.

Chapter 28: Unemployment

Chapter 28 is all about employment and how it is measured, what types exist, and the reason for its existence. The economy’s natural rate of unemployment is the amount of unemployment that the economy normally experiences. There are three kinds of workers: employed, unemployed, and not in labor force. Employed refers to paid employees, both full time and past time. Unemployed workers are people who were once available for work and have tried finding employment. People not in the labor force are neither looking for a job or employed. Discouraged workers are also people who would have liked to work, but have given up looking for a job, so therefore have been eliminated from the labor force.

The labor force consists of employed and unemployed added together, and the unemployment rate is the number of unemployed divided by the labor force times 100. The labor force participation rate is the labor force divided by the adult population times 100.

There are two kinds of unemployment: frictional and structural. Frictional employments is employment that comes from workers taking time to search for jobs best suitable to their interests. Structural unemployment that unemployment hat results from lack of available jobs in the market. Job search is the process by which workers find appropriate jobs given their tastes and skills.

Unemployment insurance is a government program that partially protects workers’ incomes when they become unemployed, explaining why people could be not considered to be part of the labor force. People respond to incentives, so they no longer look for a job because they are still getting paid.