March 19 - Wrapping up Macro and International

Wrapping up Macro:

The Federal Reserve uses Monetary Policy to adjust the economy. 
The Federal Government uses Fiscal Policy to adjust the economy.

The Fed's two main tools under Monetary Policy are setting rates and buying/selling bonds.
The government's two main tools under Fiscal policy are taxing and spending.

If there is too much inflation in the economy we can fix it by reducing the amount of money in the economy.  This is called contractionary policies.  We are contracting the money supply.

If there is too much unemployment and if GDP is low, we can fix it by adding to the amount of money in the economy. This is called expansionary policies.  We are expanding the money supply.

When it wants to be contractionary the Fed will raise rates and sell bonds.
When it wants to be contractionary the Government will raise taxes and lower spending.

When it wants to be expansionary the Fed will lower rates and buy bonds.
When it wants to be expansionary the Government will lower taxes and increase spending.

Here are two questions to think about:

1) If we are in a recession, and the government adopts expansionary policies, why is that a bad thing as far as the national debt is concerned?

2) Given the solutions above what's so bad about stagflation?

International Economics:

We handled the bulk of International Economics back when we learned about absolute and comparative advantage.  Today's power points fill in a few of the gaps as it relates to Free Trade vs Protectionism. 

First we look at the six categories of trade barriers.

People in favor of protectionism raise several arguments.  However, if we truly understand the benefits that come from comparative advantage and free trade, most of those arguments fall flat. 

Still there are some trade agreements that are working towards more open trade.

The other topic in International economics is exchange rates and measuring trade.  It's pretty simple.

Power Points:
Trade Barriers and Agreements
Exchange Rates and Measuring Trade

Worksheets:
Exchange Rates