Economics help.

Hey all,

I've got a big economics final coming up. I've been looking through my notes and at the study guide and I have a few questions. Obviously i'm not here saying, "please do this for me." But I would just like some guidance from anyone who may be knowledgeable in the field. Like I said, this is just for the study guide anyway, so a direct answer probably wouldnt even get me the grade unless I can study it and understand it. I've never missed a single class this semester for the economics class (it's macro, by the way) and I'm still just lost. Anyway, now that the lengthy intro is out of the way, here are my questions:

I've got the functions of banks listed as 'lending money, holding money, protecting held money, etc.' but i'm supposed to understand that there is a contradiction here. I'm not seeing one, unless my functions are incorrect.

Also, on the United States dollar, it says, "this note is legal tender for all debts public and private". When in a daily situation would currency not be a liable source to repay a debt? And the answer isn't metaphysical or metaphorical.
 

bobdadruma

Platinum Member
Hey all,

I've got a big economics final coming up. I've been looking through my notes and at the study guide and I have a few questions. Obviously i'm not here saying, "please do this for me." But I would just like some guidance from anyone who may be knowledgeable in the field. Like I said, this is just for the study guide anyway, so a direct answer probably wouldnt even get me the grade unless I can study it and understand it. I've never missed a single class this semester for the economics class (it's macro, by the way) and I'm still just lost. Anyway, now that the lengthy intro is out of the way, here are my questions:

I've got the functions of banks listed as 'lending money, holding money, protecting held money, etc.' but i'm supposed to understand that there is a contradiction here. I'm not seeing one, unless my functions are incorrect.

Also, on the United States dollar, it says, "this note is legal tender for all debts public and private". When in a daily situation would currency not be a liable source to repay a debt? And the answer isn't metaphysical or metaphorical.
The legal tender slogan was adopted way back when, When Gold was the standard currency. It was meant to instill confidence in the dollar.
Banks have to frequently take calculated risks in their lending to insure growth in moderately risky investments that they deem to be prudent and advantageous to growth of the economy.
I.e. A Small Business loan to a company that shows good growth potential.
 
Thanks a ton!

So now I get what the contradiction is, but how would one resolve that? And would it ultimately resolve the contradiction or just temporarily? I'm thinking its temporarily because if the contradiction was resolved ultimately, it would've been resolved. Unless my answer is incorrect. I put in my notes that the contradiction is that the banks use the money that it's holding for other people to pay out the loans which is where the bank earns it's money, but sometimes these loans are never repaid. Am I getting there?
 

bobdadruma

Platinum Member
Thanks a ton!

So now I get what the contradiction is, but how would one resolve that? And would it ultimately resolve the contradiction or just temporarily? I'm thinking its temporarily because if the contradiction was resolved ultimately, it would've been resolved. Unless my answer is incorrect. I put in my notes that the contradiction is that the banks use the money that it's holding for other people to pay out the loans which is where the bank earns it's money, but sometimes these loans are never repaid. Am I getting there?
That's correct, The banks will always have some investments that fail. It may be a loan that fails or an investment that the bank made that failed. Don't forget, Banks invest the money that they are not loaning out to make money on it while it is waiting to be used. Some of these investments may go sour also! Banks are sitting in the middle of a potentially dangerous scheme! They constantly are in flux with the short term cash flow that is coming in to keep them solvent.
So you see the banks walk a fine line. They depend on cash flow coming in from payments and interest on the money that they have lent out as well as positive cash flow from the other investments that they have made. They also have to pay interest on CD's or certificates of deposit, Savings, and Checking accounts. They use this money also in their investing and lending.
 
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Excellent. I'm starting to better understand this. So how would we resolve this contradiction? I cant think fo anything that has any weight to it. All i can think of is to not give out loans. But then this doesnt make sense because usually, thats where most of their income is from and without that income, they wouldnt be able to offer interest rates to the people who hold their money in the bank.

Also, I have a part in here that talks about an assumption a person makes about increasing government spending/cutting taxes, where they think that is will increase GDP while having minimal inflation. Then another person says no thats wrong, the exact opposite will happen. Then a third person says, that he believes the second person is right, but that due to basic flaws in fiscal policy, a contractionary fiscal policy will have the opposite effect from smoothing the economy. I need to graph these three people's views. I can do the first and second, but I do not understand the third part at all about contractionary fiscal policy.

Any idea whats going on here?
 

bobdadruma

Platinum Member
That is the situation that that banks are in currently. They can't find anything to invest in!
They can't loan money out, and they can't invest it in other things either! It is a lose, lose situation! Banks loan cash to corporations so that they can in turn make money and pay the banks back with interest. There are no companies that are making money right now to loan to! There are no investments that a bank can make to make money right now!
WHAT IS A BANKER TO DO?
If I new that, I wouldn't be here talking to you! I would be out making money.
Its above me and everyone else at the moment!
The political issues and the federal reserve issues that you speak of only complicate things further!
 
Ahhhhh I get it now. Well my brains fried now. Ill work more on this studying stuff tomorrow. I cant thank you enough, thank you!
 
Ok, heres what i'm stuck on at the moment. I know nobody can put graphs up, but if anyone can help me understand even one of these a little bit better it would mean so much to me!

1. A friend argues that a stimulative fiscal policy will end up causing inflation and crowding out, without adding much other benefit to the economy. You think you have a more sophisticated argument that favors some government spending.

A) Explain, verbally and with the appropriate graphs, your friend's view, showing how she may be correct. (In other words, why might inflation and/or crowding out occur?)

B) Explain, verbally and with the appropriate graphs, your more sophisticated view. (In other words, why might inflation and/or crowding out NOT occur, and why might economic growth result?)

2. A. The newspaper editors argue that the federal reserve should increase in the money supply to stimulate the economy, eventually shifting Aggregate Demand. Assuming the world works the way the editors want it to, carefully explain how the Fed does it, making sure to discuss the role of banks. Show graphically (though without numbers) how it should work.

B. A TV analyst enters the conversation and says, "I hate to divulge a big secret, but we are really unable to control the money supply much at all, especially if we try to reduce it." Carefully explain, using prose and graphs, why she is correct, and what it implies about the shape of the money supply curve.

3. Derive the Aggregate demand curve. In your derivation, carefully explain where the terms in aggregate demand come from.
 

TheGroceryman

Silver Member
Ok, heres what i'm stuck on at the moment. I know nobody can put graphs up, but if anyone can help me understand even one of these a little bit better it would mean so much to me!

1. A friend argues that a stimulative fiscal policy will end up causing inflation and crowding out, without adding much other benefit to the economy. You think you have a more sophisticated argument that favors some government spending.

A) Explain, verbally and with the appropriate graphs, your friend's view, showing how she may be correct. (In other words, why might inflation and/or crowding out occur?)

B) Explain, verbally and with the appropriate graphs, your more sophisticated view. (In other words, why might inflation and/or crowding out NOT occur, and why might economic growth result?)

2. A. The newspaper editors argue that the federal reserve should increase in the money supply to stimulate the economy, eventually shifting Aggregate Demand. Assuming the world works the way the editors want it to, carefully explain how the Fed does it, making sure to discuss the role of banks. Show graphically (though without numbers) how it should work.

B. A TV analyst enters the conversation and says, "I hate to divulge a big secret, but we are really unable to control the money supply much at all, especially if we try to reduce it." Carefully explain, using prose and graphs, why she is correct, and what it implies about the shape of the money supply curve.

3. Derive the Aggregate demand curve. In your derivation, carefully explain where the terms in aggregate demand come from.
For the first one, inflation occurs when Aggregate Demand increases too much. There should be a vertical line on your AD/SRAS graph labeled "full employment." if AD increases enough so that GDP is in front of full employment, inflation occurs due to an increase in the supply of money. Crowding out occurs when government spending is financed without the increase of taxes. Thus they need to finance through borrowing. when the government demands more money, money demand increases, causing an increase in interest rates. this increase in IR results in small businesses being more reluctant to invest. This investment is crowded out. inflation/crowding out might not occur if government doesn't spend that much, and can finance the increase in Government spending with current tax rates.

As for the second one, im not sure, cause what i learned, money supply is increased through open market operations from The Fed, though the money supply curve is vertical, so perhaps in the long term, money supply doesn't ever change.
 

zambizzi

Platinum Member
Ugh...Keynesian claptrap...

Expansion of the money supply *is* inflation, by definition. The question is; does inflation cause price increases. We can look at any number of charts and see that it clearly does. The dollar has lost 95% of its value since 1913, when the Fed was installed. We can overlay that with another chart showing wage growth in any (private) industry and see that wages do not keep pace with inflation. A worker earning minimum wage in 1980, for example...would need to be making over $11/hr. today *just* to have kept up with inflation.

The stimulative inflation used both in the Great Depression and the current depression only serves to distort the real economy, prop up prices of worthless assets, and prevent the necessary correction brought on by years of monetary inflation. It prolongs the inevitable and makes the final outcome far worse than it would have been, had the correction just been allowed to occur. See the Depression of 1920-1921, for a reference and compare it to 1929-1945.

Inflation occurs from creating new money out of thin air and passing it through the fractional-reserve banking system. More money does not create wealth, it just raises the prices for the finite number of resources and goods that exist on the planet. Bank reserves have gone from appx. $2B in 2007 to over $800B today. The only reason we haven't seen that multiplied into $8T is that banks are currently not lending in huge amounts, to individuals and businesses. It hasn't made its way into the economy yet. When it does...hello hyperinflation. It's a true rock and a hard place for the Fed.

Economics can't be boiled down, aggregated, and pushed through some model. It relies on individuals and the choices they make...Human Action.

I encourage any of you who are being indoctrinated with Keynes, to look at the sensible alternative - the Austrian school (Sennholz, Hayek, Mises, Rothbard, Rockwell, etc.):

http://www.mises.org/
http://www.lewrockwell.com/

Keynes created the mess we're in...the Austrians predicted it; both the first depression and the current...and described it in detail. They describe the roots of the business cycle and provide a common-sense approach to economics. Check it out!
 
Hey I owe you both A LOT. I'll send you some demon drives... sorry, but I wish I could!

Thank you both so much. Within a day I went from certaintiy of failing this final to thinking I might get a B on it. Big difference!!!
 
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