Sep 04 2008

The Federal Reserve and the tradeoff between unemployment and inflation

Federal Reserve sees slow economy, higher prices – Sep. 3, 2008

Weak aggregate demand and rising costs due to still high energy and food prices put the US economy in a tricky situation, one in which the Federal Reserve is forced to make the tough decision between tackling the unemployment problem (jobless rates have risen to 5.7%) or the inflation problem (price levels have also risen 5.7% this year, the highest inflation in 17 years).

The nation struggled with slow economic growth and still-high prices that are weighing on consumers and businesses alike…

Fed Chairman Ben Bernanke and his colleagues are all but certain to leave a key interest rate alone at 2% when they meet next on Sept. 16 and probably through the rest of this year.

Given the fragile state of the economy, the Fed isn’t in a hurry to boost rates to fend off creeping inflation. A growing number of analysts believe the economy is likely to hit another dangerous rough patch later this year as consumers and businesses curtail their spending even more.

Heading into the fall, economic activity continued to be slow, the Fed said. Businesses described the climate as “weak” or “soft” or “subdued.”

Consumers, the lifeblood of the economy, showed caution. Shoppers “concentrated on necessary items and retrenchment in discretionary spending,” the Fed observed.

In the short run, as year 2 IB students know, society faces a trade off between high inflation and high unemployment. Rising prices and rising joblessness are both harmful to the economy, but when energy and food prices drive up the price level, while week investment and consumer spending lead lead to falling overall demand in the economy, the conditions exist where joblessness and prices can rise simultaneously. This is America’s situation at present.

The Fed must chose which problem to address. Ben Bernake, America’s central bank chief, could chose to tackle rising inflation by raising interest rates, which would discourage new investment and reduce demand for resources by firms in the economy. Investment spending by firms and consumption by households would decline, putting downward pressure on prices across the economy.

In the short-run, however, the decline in investment and consumer spending that would result from higher interest rates would exacerbate the already weak level of aggregate demand in the economy, driving unemployment even higher.

By keeping rates low, Bernanke hopes to encourage investment and consumption, which will contribute to overall demand in the economy. By encouraging new spending and investment, however, the threat that inflation will rise even more remains present.

In the trade off between unemployment and inflation, the Republican White House and the Democratic Congress made it clear that unemployment was the most important problem to address when they announced the $160 billion expansionary fiscal stimulus package earlier this year. By keeping rates at a low 2%, America’s central bank is also indicating that increasing employment is of greater importance than lowering the price level.

Discussion questions:

  1. Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
  2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
  3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising
    inflation worries. Wary employers have cut jobs every month so far this
    year and aren’t inclined to be overly generous in their compensation to
    workers amid ‘a general pullback in hiring,’ the Fed said.
    If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author


234 responses so far

234 Responses to “The Federal Reserve and the tradeoff between unemployment and inflation”

  1. John B.on 05 Sep 2008 at 8:03 am

    Hey Mr. Welker,

    I haven't polished up on my year two economics recently, but I'm wondering how greater politics might play a role in congress' decision to focus on unemployment over inflation. The republican anti-tax stance places consumers squarely in charge of their own financial position by limiting government assistance.

    In some respects it seems like allowing a degree of inflation contributes to the greater theme of individual economic independence.

    I would expect that this would be a minor consideration amongst other more important economic considerations, but just a thought.

    John A. Bianchi

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  2. Miguel Campos Silvaon 06 Sep 2008 at 6:32 am

    Although low interests do create a shift in aggregate demand, a decrease in the interest rates(also known as contractionary monetary policy) will also result in a shift out of aggregate supply. The explanation for this is as frims increase investment, they might invest in capital goods, which will result in a shift of aggregate supply.

    As the philip curve states, there is a trade off between inflation and unemployment(as inflation increases unemployment decreases, and as inflation decreases unemployment increases). Therefore the government must make a decision on which one to fix, inflation or unemployment. The government for example could use expansionary fiscal policy to solve unemployment and contractionary fiscal policy to solve inflation. What is interesting is that governments usually chose to solve unemployment. The reason for this is mainly politics, the unemployed will be unhappy and will want change and to keep "the people" happy the government usually choses to solve the unemployment issue.

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  3. Joelon 06 Sep 2008 at 7:09 pm

    Lowering interest rates has positive implications for supply within an economy because firms can afford to borrow more money. As the cost of borrowing has been lowered, firms can take out loans at low interest rates from lenders and invest in capital goods. This has long term benefits, as capital equipment constantly needs to be renewed.

    It would seem that tackling unemployment is a higher priority for the government in this, the year of the US elections. Although Bush virtually has nothing more to lose as he is on the out, there might be Republican party pressure exerted on him to protect citizens jobs as they forward their new candidate, John McCain.

    As to the question of rising unemployment and rising wages, it is clear that this is an example of stagflation. This economic phenomena was first seen in the 1970s when despite high unemployment, economies continued to suffer from high inflation. Just as in the 70's this phenomena has made a comeback, fuelled once again by supply shocks such as the high price of oil. As consumers have to pay higher prices, they demand higher wages. This inevitably raises costs for employers, and they begin to lay off workers, even though there is large competition for employment. The supply shock has implications for the natural rate of unemployment, since as costs to the consumer have been raised substantially, workers are not prepared to supply their labour below a certain wage level. Therefore a large pool of unemployment remains, coupled with rising inflation.

    It is not likely that this situation will self correct, and therefore the government may consider the use of certain policies such as contractionary monetary policy. Increasing the interest rates would take money out of the system, so combating inflation. This could be combined with such supply side policies as decreasing the power of trade unions, allowing wages to be effectively lowered. Supply side policies were developed in the 70s to combat exactly this problem. They increase agregate supply, and so output, allowing firms to employ more workers. The only problem with these measures is that they are only effective in the long term, and so do not provide instant relief from economic trouble.

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  4. Liviaon 08 Sep 2008 at 2:39 am

    So i had written this really long response and then it said that some quote was exceeded, so now to make it brief, i said that i disagree with using contractionary monetary policy because although it would decrease investment and consumption (by lowering consumer confidence), it would simply drive the country in further recession without resolving inflation or unemployment. Instead i think that the government should introduce supply side policies. Although these do usually work in the long run, if somehow the government manages to encourage the unemployed to seek and get jobs, this would increase consumer confidence and help unemployment. Also as there are more workers, production could increase, therefore there wouldnt be such a competition for prices and so the price levels would decrease, helping inflation. This is all theoretical however, because it depends on how well the government manages to encourage work and how many people will actually listen and try finding a job.

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  5. masayaechlf09on 22 Mar 2010 at 12:51 am

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Although lower interest rates are clearly demand side policy, it also enables suppliers or producers to loan money at lower interest rate from the banks and invest in capital goods for new technology, new labor skills, etc. The loaned money can possibly expand the firm size and accept more workers, and consequently, relieving the unemployment rate.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Increasing employment is a higher priority to policy-makers than bringing down the inflation rate because the solutions for unemployment are more visible in the short-run, in contrast to dropping inflation that would take quite a while to see the effects. The fact that it is an election year matter because popular vote would usually go to the party with the more impressive for social problems, hence, it is necessary for the incumbent party to shows its ability to solve problems. In addition, politicians are choosing unemployment over inflation because unemployment are problems that far more familiar to the voters and have direct connections with their lives.

    3. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    The situation of US economy is a clear example of stagflation, a period of high inflation rates and high unemployment rate occurring simultaneously. It is unlikely that the US economy will ever 'self-correct" from in times of an economic slowdown because these problems would create a vicious cycle in which the situation would worsen. The anticipation for inflation trigger's people's expectations for higher wage, and these expectations become a self-fulfilling prophecy as the inflation rate keeps rising – there is no limit to the inflation unless people realize. The Phillip Curve best explains this situation. In the modern day economics, the Keynesian approach is more reasonable and practical especially in a situation like this. To combat this situation, there are several solutions that the government can do to reduce inflation and unemployment: reduce the power of trade unions who resist in reduction of real wage and impose minimum wage; issue combination of reduced benefit and lower tax to induce the unemployed to take lower paid job; increase geographical and occupational mobility through retraining; or establishing an effecient system of information flow for the unemployed.

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  6. mei.echl.f09on 22 Mar 2010 at 4:16 pm

    1. Lower interest rates encourage firms to take out loans because they pay lower returns on them. They can use these loans to purchase capital goods which can be used to increase their total output, this shifting the aggregate supply curve to the right.

    2. Increasing the employment rate would probably be more important to policy makers, because the positive benefits of reducing unemployment are more visible and widely felt. This is especially important during election year; as politicians will be trying to gain support by promising policies that appeal to people. Thus, promising to reduce unemployment, or successfully doing so, is of an advantage to the current party in power because it wins them support and so they are more likely to do well in the recession. Lowering interest rates does not have such an immediate effect and is likely to take a longer time and making this an issue a priority is less likely to resonate with the public.

    3. When interest rates and unemployment rates both rise, this is known as stagflation. I think that the U.S's ability to correct itself in times of a recession largely depends on how harmful it is and how widespread. In times of serious economic difficulty, like the 2007 financial crisis and the 1929 Wall Street Crash, however, I think that the US has very little chance of recovery, (or it would take a very long time), and some form of government intervention must be taken. Otherwise, things will head in a downward spiral; with the prices of goods and services rising but a fall in people's ability to consume them, and also people unreasonably expecting their wages to rise to match the rise in inflation, which causes them to increase further.

    Under these circumstances, I think it is the responsibility of the government to a)keep a careful watch on the economy – not controlling it, just being aware of the situation and having plans that can be implemented to prevent a recession and b)In times of recession, for them to be proactive about introducing demand-side policies; reducing interest rates, job training schemes, subsidies for industries, increased unemployment benefits, reduction in the power of trade unions and imposition of minimum wages, and so on, so there is a support system for the economy and the people.

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  7. mei.echl.f09on 22 Mar 2010 at 4:21 pm

    Masaya,

    I think that your points about requiring a lot of government intervention in order to end or reduce the harmful effects of a recession are very relevant in the US today, with all the damage being done by the financial crisis. The events leading up the financial crisis show that careful regulation/observation of the market is needed, even during boom times, because virtually all the economic problems in America today are the result of a small number of greedy individuals, in control of a disproportionate amount of money, who are given free reign.

    Another thing is, I know a lot of Americans can be quite opposed to the idea of government intervention in the market. But I think that under current circumstances, the economy cannot do without stimulus supplied by the government, and that there are also many desperate people out there, made even more desperate by the financial crisis, who really need some kind of support network (minimum wages, etc), to balance out the rich-poor divide.

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  8. daniel.echl.f09on 22 Mar 2010 at 10:37 pm

    1.Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    By decreasing the interest rate this will lead to an increase in loans as businesses will be able to take money out at much lower rates and therefore investing more money in capital goods in order to increase output and efficiency of the business. The consumers will also benefit form this as there payments will be decrease this means that they will have more disposable income which they can use to send and therefore putting more money into the economy. The move to decrease the interest rates would increase the AD demand in businesses and consumers alike.

    2.Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    I think that there is an emphasis on unemployment for various reasons firstly because this is directly effecting the people and so policy makers are trying to appeal to the common people and this is more of an issue for them. Decreasing unemployment will als mean that the reward form this will be realised by the public more than other policies. The increase in employment will also mean that people have more money they are able to put back into the economy and so aiding the circular flow with more wages it means more money can be put back into the economy. The fact that it is an election is also key as politicians fight for every seat they can get and so they will try to please the common populous in America and un employment has greater effect on them than the inflation rate and so this has given unemployment a higher status.

    3.“Workers’ wage gains – characterized as ‘modest’ – aren’t raising

    inflation worries. Wary employers have cut jobs every month so far this

    year and aren’t inclined to be overly generous in their compensation to

    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    I personally don't think that the American economy will ever self correct it self and if it did i think that the american economy would be shattered and they would no longer hold the power that they have no and so i feel that government intervention is necessary. The fact that the unemployment rate is increasing and inflation is increasing it will lead to a mis match and this will render the consumers unable to afford basics will dramatically affect living standards and will bring large social cost to America. This is why i firmly believe that it is of the government's role to aid and control the market of today because of its inability to self correct itself. I believe in times of recession that the government should implement both monetary and fiscal polices to stimulate the market it is also a role of the government to keep recession at bay during time of growth so it doesn't happen.

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  9. daniel.echl.f09on 22 Mar 2010 at 10:44 pm

    Mei,

    Great response to the passage and i am in agreement with your last question. I think that the government has a duty to the tax payers to stabilize the market and offer stimulus es in these times of need also i think its very true that the government need to be able to have plans ready to implement so they are able to prevent this from happening. Your answer to question one you state the effects this will have on the business i feel that this will also have a great effect on the consumers as there cost reduced meaning that they have more free cash available which means there will be more money put into the economy.

    Dan

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  10. Mattea.echl.f09on 23 Mar 2010 at 4:07 am

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lowering interest rates results in more loans, to both people and businesses. As businesses are better able to get money, they can invest more in capital. This leads to the long-term growth of firms.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Generally, inflation is not generally acknowledged unless it is to the point where it has serious economic effects. Unemployment, however, is strongly prominent in peoples' lives. If a person doesn't have a job, then they are unlikely to be happy with their current situation. This makes them more likely to vote current politicians out of office.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising

    inflation worries. Wary employers have cut jobs every month so far this

    year and aren’t inclined to be overly generous in their compensation to

    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    If wages rise even as unemployment rises, the economy will likely never self-correct. Wages are the price of labor in the labor market. The higher the price of labor, the lower the quantity demanded. This means that firms will higher less workers, and unemployment will continue to rise. The economy will probably not self-correct.

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  11. Mattea.echl.f09on 23 Mar 2010 at 4:10 am

    Daniel,

    You mentioned that employment is more emphasized than inflation because when people earn more money, they will put their wages into the economy, and the economy will grow. Doesn't this contribute to inflation? When people have more money to spend, aggregate demand rises. This means that prices will rise, as a result of demand-pull inflation. Because of this, a reduction in unemployment can cause inflation.

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  12. Marcelo.echl.f09on 23 Mar 2010 at 7:09 am

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Logically, if interest rates are lower, business can make a better profit out of loans; thus they have an incentive for more invesments, and indeed, start investing more. Hence, there are larger inputs being made to the economy, creating economic growth, resulting in positive effects.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Yes, indeed, I think that the fact that it is an election year is a crucial factor when choosing to prioritize cutting down unemployment, since policy makers will be wanting to get the support of the people, and what better way of doing it than giving them jobs? In addition, unemployment also greatly affects the standards of living of people, and decreases the level of production of the country. So, even if it was not an election year, the government should take care of unemployment before inflation.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    Well, eventually, it might, yes. Here's the thing: one would expect that, as wage rises, labor costs get greater, and thus businesses will lay off workers to reduce their costs, further increasing unemployment. However, as wages rise, those lucky ones have more money to spend and thus increase aggregate demand, making firms earn more, and eventually, be willing to produce more again, and hire back workers. Nevertheless, it is also possible that the wage rises do not affect aggregate demand, since they rise when others are deleted, after workers being laid off. So, I don't know. Depends on what happens after the first step, and whether the economy is able to pull itself back again after reaching its minimum level.

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  13. Marcelo.echl.f09on 23 Mar 2010 at 7:17 am

    Mattea, answering to your response to Daniel,

    However, inflation is indeed a sign of economic growth, isn't it? As you said, aggregate demand increases… And aggregate demand increases because unemployment decreases, theoretically increasing production as well, let's say supply. Nevertheless, you are right, since, if demand grows faster than supply, due to consumer confidence and low interest rates, inflation will be leading to higher production costs, and thus unemployment in a further step, causing economic breakdown. But still, if supply is able to keep up with demand, due to technological advances which make production faster and a decreasing the need of workers, the economy will maintain its equilibrium. Or am I wrong?

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  14. Trevor.echl.f09on 23 Mar 2010 at 1:10 pm

    1. It’s very possible that lowering interest rates will lead to positive supply-side effects. Supply-side policies are ones that will fuel business growth and investment. With lower-interest rates, investors may find it easier to borrow money in order to invest in companies that would otherwise not be financially attractive.Also, this is easier for companies to acquire money with lower interest rates, allowing them to take bold new business ventures that will affect the supply side.

    2. Elections are about people and what they think their elected officials are doing. If they lost their job because of a predictable and preventable routine of cyclical unemployment, some politicians may be losing their own jobs. Inflation is not something that really affects people as much as having a job does. That’s why this is the most important issue. Especially because of the fact that voters are going to the polls soon.

    3. It’s certainly a valid economic question. But I think that unlike unemployment which can reach very low levels naturally, wages will not rise to an indefinite rate. There are certain restrictions on this that will prevent such a scenario. Wages will not rise indefinitely and are tempered by the fact that at some point businesses will want to start hiring more workers and expanding once again. It’s just part of cyclical unemployment.

    Trevor Tezel

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  15. Trevor.echl.f09on 23 Mar 2010 at 1:15 pm

    Mattea,

    I completely agree with you on your first point. On your second, I wonder whether or not the fact that prices are increasing with inflation, a very visible and important affect, that the public opinion toward the issue changes. It’s not as if this is just a concept which only politicians care about. Inflation affects all Americans. On the third point, I would argue that at some point there is a limited range on the amount of a wage increase that could be granted. But I see your point….

    - Trevor Tezel

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  16. Chamonix.echl.f09on 23 Mar 2010 at 1:19 pm

    1. Lowering interests would reduce interest, which would drive up investment. This would increase supply in the US as more investment leads to more production.

    2. I do think that lowering unemployment is a higher priority to policy-makers than combatting inflation. The unemployed and those with unemployed friends and family members are a large voting force, which makes the fact that this was an election year important.

    3. If wages and unemployment continue to rise at the same time, it is unlikely that the United States economy will ever be able to self-correct becuase firms will not be able to afford to hire new workers.

    Chamonix

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  17. Chamonix.echl.f09on 23 Mar 2010 at 1:26 pm

    Trevor,

    I liked what you had to say about wages only rising to a certain rate. It is true, there is only so much that businesses can support. Of course, with low levels of employment production rates will fall, which will mean that firms will not make more profits than they might normally despite rising price. I think that in many cases employers will have to drop wages to hire new employees. This will have s detrimental effect on those already working, but I guess that it is worth it for the good of the whole economy.

    Great Post!

    Chamonix

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  18. sara.echl.f09on 24 Mar 2010 at 12:39 am

    1. Lowering interest rates can result in positive effects for the economy because it will mean that firms can afford to take out loans and invest in capital goods. The loaned money can then buy new technology, new labour skills, and allows for more workers which can decrease the unemployment rate.

    2. Increasing employment is of a higher priority to policy-makers than bringing down the inflation rate because solutions to increase employment are more visible and will happen a lot faster than dropping inflation, which would take a longer time. The fact that it is an election year matters because the candidates will find solutions that appeal more to the voters, and in this case, decreasing unemployment would be it. Unemployment is something that all voters would like to see solved and will vote for the candidate that puts more priority to this. Therefore, the government will be focused on this first and will deal with inflation later.

    3. The simultaneous rise in interest rates and unemployment rates is known as stagflation. It is not very likely that the US economy will ever “self-correct” itself because with the rise in prices of goods and services comes people’s inability to consume them and expecting a rise in their wages to match the inflation rates, causing a vicious cycle. It would be very difficult for the economy to correct itself in this situation and some form of government intervention will probably be needed.

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  19. sara.echl.f09on 24 Mar 2010 at 12:44 am

    Trevor,

    I liked what you said about wages only rising to a certain point. I agree, firms can only increase their wages so much, and after a certain amount of time they will want to expand the company and will need to drop wages in order to hire more workers. If this happens with all, or most firms, the unemployment rate will slowly start to decrease and the economy can slowly start to mend itself.

    Sara

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  20. Dennis.echl.f09on 24 Mar 2010 at 3:09 am

    1. Lowering interest rates can result in positive supply-side effects for the economy because businesses will be encouraged invest, and some of their investments will go into capital goods, therefore shifting supply to the right.

    2. Increasing employment is of a higher priority than bringing down inflation rate because policies to increase employment will be directly felt by the public and will therefore be favored in an election year. Politicians try to win the public over with policies that they will actually care about in the short run, thus increasing employment is the clear winner. The public sees the effects of inflation lowering policies much later, therefore politicians cannot really use it to their advantage.

    3. If wages continue to rise along with unemployment and there is absolutely no government intervention, I believe the economy will not simply "self-correct," however, the government always finds a way to intervene and regardless of what policy they decide to go with, it will eventually continue the cyclical movement and bring the economy back to normal. The cyclical behavior of the economy will not just stop because wages and unemployment are simultaneously rising, there will simply have to be a new solution, but it can be fixed.

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  21. Dennis.echl.f09on 24 Mar 2010 at 3:16 am

    Sara,

    You and I answered pretty much exactly the same for every question. I'm just wondering, for number two, what exactly would be an appropriate government intervention to fix the stagflation? I'm not sure, but I am pretty sure that regardless of the situation, the economy will always pull back because of its cyclical nature.

    -Dennis-

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  22. karen.echl.f09on 26 Mar 2010 at 10:45 pm

    1.Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy? Lower interest rates support firms to take out loans because they pay lower returns on them. They can use these loans to obtain capital goods which can be used to increase their total output.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter? Increasing the employment rate would probably be more important to policy makers, because the positive benefits of reducing unemployment are more visible and widely felt. This is especially important during years of election; as politicians will be trying to gain support by promising policies that appeal to people. Thus, promising to reduce unemployment, or successfully doing so, is of an advantage to the current party in power because it wins them support and so they are more likely to do well in the recession. Lowering interest rates does not have such an immediate effect and is likely to take a longer time and making this an issue a priority is less likely to resonate with the public.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising

    Inflation worries. Wary employers have cut jobs every month so far this

    Year and aren’t inclined to be overly generous in their compensation to

    Workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown? The U.S’s capacity to correct itself in times of a recession largely depends on how harmful it is and how widespread. In times of serious economic difficulty, like the 2007 financial crisis and the 1929 Wall Street Crash, however, I think that the US has very little chance of recovery, (or it would take a very long time), and some form of government intervention must be taken. Otherwise, things will head in a downward spiral; with the prices of goods and services rising but a fall in people’s ability to consume them, and also people unreasonably expecting their wages to rise to match the rise in inflation, which causes them to increase further.

    Under these circumstances, I think it is the responsibility of the government to a)keep a careful watch on the economy – not controlling it, just being aware of the situation and having plans that can be implemented to prevent a recession and b)In times of recession, for them to be proactive about introducing demand-side policies; reducing interest rates, job training schemes, subsidies for industries, increased unemployment benefits, reduction in the power of trade unions and imposition of minimum wages, and so on, so there is a support system for the economy and the people.

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  23. Armando.echl.f09on 26 Mar 2010 at 10:48 pm

    1.Governments can use exchange rates to affect economic performance. A rising exchange rate, which is often linked to an increase in base interest rates, leads to exports becoming more expensive but imports falling in price. This would reduce part of the inflationary pressure within an economy. A fall in the exchange rate would lead to the reverse and might help domestic businesses export more.

    2.Increasing employment is of a higher priority than bringing down inflation rate because deflation may cause people to postpone their spending in the expectation of even lower prices in the future. When this happens, aggregate demand falls, businesses are unable to sell their goods, make profits or meet their debt repayment obligations, and they may be forced to cut output and employment of workers. A downward spiral becomes established in which aggregate demand falls even further which leads to even lower price

    3.If wages continue to rise along with unemployment plus no government intervention; the US economy is very likely not “self-correct” itself because the increase in prices of services and goods will make them expect of increase in their wages to relate the inflation rates which will cause a malicious problem.

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  24. Armando.echl.f09on 26 Mar 2010 at 10:50 pm

    Marcelo,

    Marcelo, you have written your answer very long which showed many details of facts I could learn of inflation, deflation relating to the employment and unemployment. Of course, I noticed the questions we have had to do were very interesting and much better for me to learn and so, even through your answer, more than what I knew, I could learn more and in more detail. Thank you!

    Armando.

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  25. masayaechlf09on 27 Mar 2010 at 1:05 pm

    @Armando
    I think you got it the wrong for question one.

    Let’s say that you own a export company in Japan and your trade partner is in US. When Japanese yen is stronger than US dollar (for example 90yen = 1 dollar), it is disadvantageous for your company because for every dollar you sell in US, you only get 90yen. On the other hand, when Japanese yen is weaker than US dollar (for example 110yen = 1 dollar), you earn more profit because for every dollar you sell in US, you get 110yen. You see.

    It gets confusing because we tend to think in consumer perspective. Obviously, it is advantageous for me when Japanese yen is stronger because I can get US products cheaper than market price due to exchange rate. But it is disadvantageous for firms who sell oversea.

    Did I make this clear, or made it more confusing?

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  26. Catherine.echl.f09on 28 Mar 2010 at 6:48 am

    1.) With lower interest rates, firms can be expected to take out more loans, purchase more goods, and potentially expand their business. The investments that lower interest rates encourage can lead to expansions in manpower (new jobs) or technology – which would increase supply. Consumers would also be encouraged to purchase more, and invest more money in the economy.

    2.) In an election year, people are more likely to vote for the party that implements significant change. This change has to be something positive that the voters can feel the affect of, which therefore makes the voters automatically more receptive to social change. By decreasing unemployment, the government can help the people who are suffering most – those without jobs. While decreasing the inflation rate is an important issue to address as well, increasing employment is a higher priority in the short run, especially in an election year.

    3. If wages continue to rise even as unemployment rises, the U.S. economy will not self-correct from times of an economic slowdown. This type of division would greatly separate the American public. There would be those with jobs and increasing wages, and those without any income (people who would make up a growing percentage of the population). This scenario would greatly affect the consumer’s ability to purchase goods available in the market, a negative in all aspects. Here, Keynesian economics would work better, I think. Keynesian economics promote government help in times of hardship. When more and more people are unemployed, the government should intervene to correct the economy, especially seeing as, in this situation, the economy probably would not correct itself.

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  27. Catherine.echl.f09on 28 Mar 2010 at 6:55 am

    Hi Mei,

    I liked your response to the third question, and your comparison of the relationship between a government and its people to a support system. I think there is a delicate balance between a government being too involved and it being not involved enough. Definitely, in a situation like this, the government should be involved in the problem and help fix it. You also give great examples of what the government can do to help the problem, like subsidies for industries and increased benefits for the unemployed. Great post!

    - Catherine

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  28. Laura Yilmazon 03 Apr 2010 at 12:15 am

    1. Lowering interest rates has positive implications for supply within an economy because firms can afford to borrow more money. As the cost of borrowing has been lowered, firms can take out loans at low interest rates from lenders and invest in capital goods. This has long term benefits, as capital equipment constantly needs to be renewed.

    2. In an election year, people are more likely to vote for the party that implements significant change. This change has to be something positive that the voters can feel the affect of, which therefore makes the voters automatically more receptive to social change. By decreasing unemployment, the government can help the people who are suffering most – those without jobs. While decreasing the inflation rate is an important issue to address as well, increasing employment is a higher priority in the short run, especially in an election year.

    3. If wages continue to rise along with unemployment and there is absolutely no government intervention, I believe the economy will not simply “self-correct,” however, the government always finds a way to intervene and regardless of what policy they decide to go with, it will eventually continue the cyclical movement and bring the economy back to normal. The cyclical behavior of the economy will not just stop because wages and unemployment are simultaneously rising, there will simply have to be a new solution, but it can be fixed.

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  29. Laura Yilmazon 03 Apr 2010 at 12:18 am

    catherine,

    i just loved when you said: "the economy probably would not correct itself." that is not even a probably sentence; economy is NEVER going to correct it self.

    Laura

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  30. Ralph.echl.f09on 04 Apr 2010 at 3:26 am

    # Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Supply side policies encourage business growth and investment. With lower interested rates, investors are able to borrow money to invest into companies or companies can take out loans to invest into capital goods or more employment. Over long term this will help supply.

    # Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Increasing employment will increase aggregate demand, as consumers have more money to spend. As lowering inflation rate is long term, this cannot be achieved quickly. Therefor this being an election year does make a very big difference.

    # “Workers’ wage gains – characterized as ‘modest’ – aren’t raising

    inflation worries. Wary employers have cut jobs every month so far this

    year and aren’t inclined to be overly generous in their compensation to

    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    History has shown that without government intervention, you can simply not get out of this type of spiral. It depends on the severeness of the downfall but the recession of 1929 and the in the fragile economic climate we are still in today. I reckon the US economy wouldn't "self correct" as history has proved it and its unrealistic looking at the situation.

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  31. Eline.echl.f09on 05 Apr 2010 at 1:00 pm

    1)Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    By lowering interest rates the government is not only giving consumers confidence but also firms as they will take on loans, since they have to pay lower returns on them, and with those loans can invest in more capital goods and increase the productivity of the firm, thus creating a higher aggregate supply.

    2)Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    In elections politicians will strive to gain the most voters by promising the policies the majority of the people want. Unemployment is a more popular issue than inflation to most people, as it is more felt by the population while inflation is more a long run phenomenon that is hardly perceptible and not many people are fully aware of the consequences inflation has in the long run. Thus policy-makers will tend to prioritize unemployment as it is more popular with the general public.

    3)“Workers’ wage gains – characterized as ‘modest’ – aren’t raising

    inflation worries. Wary employers have cut jobs every month so far this

    year and aren’t inclined to be overly generous in their compensation to

    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    With wages rising companies will lay off workers to decrease their costs. In doing so unemployment rises and people will find it harder to get by, especially considering the rising inflation. Because of this aggregate demand will go down, and with it aggregate supply as factories now have less workers. The economy would not self-correct and would need government intervention, through expansionary and contractionary fiscal policy.

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  32. Eline.echl.f09on 05 Apr 2010 at 1:32 pm

    Karen,

    I really liked your post. I agree with your ideas on the responsibility of the government in an economy – complete government control of an economy is usually detrimental and through demand-side policies the government could boost aggregate demand and thus also the economy. I do have a question though, wouldn't increased unemployment benefits encourage the unemployed to stay at home longer? And thus make it harder for an unemployed worker to find another job?

    -Eline

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  33. Jacob.echl.f09on 07 Apr 2010 at 7:57 am

    1. By lowering interest rates, consumers gain more confidence in investment. Because of increased confidence, more people will take out loans with corporations, which will allow the corporations to then use that money to buy more labor, land, and capital, thus increasing supply.

    2. The honest answer is votes. Policy-makers care about nothing more than to stay in office, and do so by playing to what the voters want. Voters want jobs. Sure prices go up, but that is something that just happens, it is not the policy-makers fault…at least that is their view. But if they don’t have a job, it’s because the policy-maker is not doing his job. So the policy-maker gives the people what they want, they tackle unemployment. FDR did it in his administration, and even though it nearly drove our country further into the ground, the voters were happy because they had what they wanted.

    3. It is possible that it will not self-correct at the current time because prices are going up and less and less people can afford simple products as it is, and then they lose their job making it worse. Since money is based purely on faith, all will be lost and the economy will die. Government intervention would then be needed, to increase faith and confidence. Lowering wages while fighting inflation would be a good turn around to balance out the economy.

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  34. Jacob.echl.f09on 07 Apr 2010 at 8:02 am

    Ralph,

    I agree with what you said about how government intervention is needed. It was supposedly Hoover's laissez-faire policies that caused the Depression. However, the government has to be careful with what they do. FDR, in my opinion, did not do much to help the economy, so his intervention was ineffective. The war got us out then, but it is certainly not helping now. This is mostly because defense spending was still high since the Cold War and we did not have to create thousands of jobs to help the effort like we did in 1939. But if the government is smart about their policies, they can speed the recovery, if not they will only lengthen the downturn.

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  35. Dibarton 10 Dec 2010 at 8:23 am

    I believe that the government tends to focus on unemployment more than inflation because unemployment is a shift that can be easily seen in the economy by the population. Also, because job security is relatively important to the population I believe it is the governments concern that the population will become restless because of a lack of employment. I also beleive that most americans dont truelly understand what inflation is and how it can also be extremely damaging to the economy. I think that in the eyes of most Americans, as long as the value of their dollar doesn't change, even if prices are rising, that their fine with current us inflation.

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  36. Lukeon 10 Dec 2010 at 1:05 pm

    I have to agree with Congress with their decision to fight unemployment rather than inflation. The Fed needs to lower the unemployment rate even if its just for a short period of time until it returns back to the natural rate of unemployment. If the Fed increases the money supply, they can lower interest rates, thus causing investment and spending to increase. Due to the increase in both investment and spending, real output and prices rise causing the unemployment rate to fall. The Philips Curve helps show the negative relationship between inflation and unemployment, and how in increase in output causes an upward movement along the short-run Philips Curve. Even though lowering the unemployment rate causes inflation to rise, I still believe it is necessary for the Fed to try to lower the unemployment rate especially during these economic times.

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  37. Deniz Kapanogluon 13 Apr 2011 at 6:38 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Maybe the fact that lowering interest rates result in positive supply-side effects for the economy is due to the fact that the people would be encouraged to invest and consume because of the low levels of interest that may be present in the economy.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Unemployment and inflation are strictly correlated, thus changing one will result in the change of the other. It is easier and more urgent for an economy to tackle unemployment rather than inflation, also because with an decrease of unemployment there will also be a decrease in the rate of inflation. I say it would be easier to change unemployment rather than the rate of inflation because in order to change inflation, the government would have to go through monetary contraction, reducing the amount of money in the economy or a fiscal expansion, diminishing the interest rate, and subsequently the inflation; and both these procedures are much longer that changing the level of unemployment. The fact that it is an election year also matters, as whoever wants to be elected wants to have the vote of whoever is jobless, thus states that the problem of unemployment will be tackled in his economic campaign.

    3. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    If wages continue to rise as unemployment rises, the economy will find itself in a position in which self-correction will become pretty difficult, and it would be possible only in a long run where an equilibrium will be found and both wage level and unemployment will go back down. But to avoid this time taking procedure, it would be easier for the government to enact some policy in order to resolve this continuing cycle.

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  38. Won_Woo_Choion 16 Apr 2011 at 2:07 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    The definition of a supply-side policy is a policy that aims to increase the capacity of the economy to produce. By lowering interest rates, not only are you increasing demand, but you are also increasing the ability of the people to produce more. Entrepreneur A was only able to produce X amount of goods from loans until the interest rates dropped and he could borrow more, expand his factory, and produce an increase Y amount of goods.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    I believe that there are political factors involved in their preference. The first goal of the politician is to be reelected, as the primary objective of the entrepreneur is to make profits. The basis of a person’s vote depends on the person’s level of dissatisfaction with the status quo. Thus, naturally, the questions at stake for the politician are which one makes people suffer more? and which one will there be conspicuous recover in the short run? Although a high rate of inflation will have a substantial impact in the people’s purchasing power and consumer well being, unemployment devastates a household – the ramifications are simply incomparable. The price of goods may rise to a degree, and people could become discontent with the state of the economy. However, when people are void of occupation and thus income, they turn desperate, and seek for a change. As for the second question, the impacts of anti-unemployment policies are more visible in the short run than those of anti-inflationary policies. Decreasing inflation rates takes a while to come to effect and cannot play a role in the upcoming elections. Therefore, the politicians would choose to tackle the former.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    The case of the United States is a clear example of stagflation, a situation in which the unemployment and inflation rates are rising simultaneously. It is highly unlikely that the US economy will ever “self-correct” itself in times of an economic slowdown because it’s locked into a vicious cycle of self-fulfilling prophecy. The people’s expectations of inflation leads to expectations in wage claims, and in many cases, a wage rise takes place. This, however, will worsen the cost-push inflation, which will further contribute to raising the people’s expectations. The government can take several measures to break free from this cycle of doom by reducing the power of trade unions, issue a combination of reduced benefit and lower tax to induce the unemployed to take lower paid jobs, increase geographical and occupational mobility through retraining, establish an efficient system of information flow for the unemployed – all of the aforementioned policies will help fight the unemployment level and cut the vicious cycle of self-fulfilling prophesy.

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  39. Won_Woo_Choion 16 Apr 2011 at 2:08 pm

    @Deniz

    3. Are you sure that 'in the long run' the economy will self correct itself without government intervention? Also, what types of policies would you recommend to tackle this issue?

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  40. Sondos2on 16 Apr 2011 at 3:13 pm

    1) Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lower interest rates, as mentioned, increase business investment and consumer expenditure or consumption since it’s now cheaper to borrow money from the bank. Increased levels of investment in the factors of production (labour, capital, raw materials, and even enterprise) contribute to an increase in productivity and thus an increase in overall output, meaning that the aggregate supply curve of an economy shifts to the right. This is certainly regarded as a positive supply-side effect. Given that lower interest rates also increase consumer expenditure, producers will be more inclined to produce more (further increase their output/supply) in response to an increase in demand in order to maximize their profits and utility. This is another positive supply-side effect triggered by lower interest rates, a demand-side policy.

    2) Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Policy makers should be more concerned about reducing inflation, rather than unemployment for several reasons.

    First of all, inflation affects the ensemble of the economy, and therefore has more significant impacts on a nation’s economy.

    During inflation, especially for individuals in a society whose wages or savings are fixed and not adjusted to inflation, purchasing power will decrease since real wages are reduced. The value of savings is also reduced. The overall loss of purchasing power reduces living standards, and generally creates unrest amongst the labour force who will opt to receive wages and salaries adapted to inflation. This will increase the costs of production, shifting the aggregate supply curve to the left, thus increasing prices, and causing further inflation and unemployment. The depreciated value of savings will discourage investment, and lower purchasing power will also do the same. Increased interest rates in attempts to reduce inflation and in order for banks to maintain their profits in real rates further decreases investment, and thus shifts the aggregate supply curve to the left, raising average price levels further. An inflationary spiral occurs. Unless inflation is reduced, the economy in question would only experience progressively slower growth.

    National exports will become less competitive internationally at higher prices, and demand for imports, cheaper (from countries with lower inflation rates) will increase, therefore increasing the leakages in the circular flow of income in the economy, and decreasing national output/income. This may lead to unemployment, not only in export industries as is China’s case, but in other industries as well. By establishing policies which fight inflation, economic policy makers are also likely to indirectly reduce unemployment.

    Unemployment comparatively does not trigger costs which are as devastating economically as does inflation. The costs of unemployment for example are lower living standards of the unemployed, higher crime rates, loss of tax revenue for the government, and increased government spending in the form of unemployment benefits. Note that all of this deals only with a minority of the population in an economy.

    In conclusion, the greater costs of inflation suggest that it should be of greater concern to economic policy makers than unemployment, although a balance between both is amongst the desired macroeconomic objectives.

    Moreover, I do not believe that this prioritization should change during an election year bearing in mind that it’s in the candidate’s greatest interest to opt for more stable rates of inflation in their economies in order to gain more political support.

    3) If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    Unemployment and inflation, the two evils of any economy, when occur simultaneously along with a lack of growth in consumer demand and business activity, are described as stagflation. This is certainly an unpleasant state for any economy to be in since policy-makers are faced by the trade-off between unemployment and inflation. Aggravating the confusion in this decision is the fact that it’s very difficult to determine which type of inflation and/or unemployment is in question, thus making the choice of policies to implement tricky. Is it possible for an economy to self-correct from this situation? Following the neo-classical LRAS approach, self correction is possible in the long run as the economy will always return to the full employment level of output. However this only happens in the long run, a situation which only comes to be after much suffering from both inflation and unemployment. Moreover the time lag after which this full employment state is achieved varies with the rates of inflation and unemployment.

    Following the Keynesian model, government intervention would certainly be necessary in order to limit the consequences of both inflation and unemployment on the economy and society in question to the minimum, and also to reduce their duration. This can be done through the administration of both demand and supply side policies. For example, the government may run a budget deficit to increase its spending in efforts to reduce unemployment, also done through the implementation of supply-side policies aiming to increase a nation’s potential level of output. Interest rates may be raised (a monetary demand-side policy) which is the best way to counter inflation. A certain rate of inflation may also be set as a goal by the central bank in order to ensure price stability.

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  41. Sondos2on 16 Apr 2011 at 3:14 pm

    Comment to mei.echl.f09:

    I agree with you on the account that increasing employment is a crucial aspect to be considered so as to maintain a healthy economy, but do you not think that reducing inflation should take priority over reducing unemployment since this does not necessarily affect all members of a society as directly and as harshly as inflation does? Moreover a decrease in unemployment may not necessarily reduce inflation, but with an increase in AD, it may trigger demand push inflation. On the other hand, if the inflation rate is stabilized, employment will also rise since producers can now invest in more factors of production (labour) at the given prices…

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  42. Abhinav Sahon 18 Apr 2011 at 11:46 am

    Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    “Workers’ wage gains – characterized as ‘modest’ – aren’t raising

    inflation worries. Wary employers have cut jobs every month so far this

    year and aren’t inclined to be overly generous in their compensation to

    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    Lower interest rates are implemented with the motive to increase aggregate demand through a rise in consumer spending, fall in saving and rise in investment. This could function as a supply side policy given that investment is a build up in the stock of capital, and more capital may lead to higher production (this is effectively an increase in the quantity of the factors of production available). Furthermore, an increase in consumer spending may lead to an increase in profits for firms, generating more funds available for expansion and further investment. firms may increase their stock of labour to facilitate this rising demand and thus expand production to fulfill rising consumer wants. Thus in the long term lower interest rates may lead to increased supply.

    Unemployment has more immediate negative effects on the economy and is more noticeable. Unemployment also has significant side effects that can result in a vicious cycle (lower incomes due to unemployment, less aggregate demand in the economy, less spending, firms' profits squeezed, more unemployment). This multiplier effect enhances the negative effects of unemployment on the economy. The unemployment rate is also a figure that more people are familiar with; inflation index numbers tend to be a barometer for economists. The average citizen is more familiar with working and could probably sympathize with the unemployed; therefore, a high unemployment rate places a demand on the government to relieve its citizen's worries immediately (especially if the year is one of political elections where the citizen's vote is imperative)

    Rising wages during times of rising unemployment results in fewer people earning a proportion of income. This income can be used to increase aggregate demand in an economy which can facilitate a rise in production as firms expand to accommodate the rising demand. thus the higher wages can 'self-correct' an economy in recession if the wages manifest into increased consumer spending. Nevertheless, this is a long shot given the high number of unemployed who would also need to begin work if the economy is to recover. Thus government intervention would be necessary to alleviate the situation in the economy.

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  43. Abhinav Sahon 18 Apr 2011 at 11:48 am

    Response to Eline.

    Eline, you mentioned that an increase in unemployment would have limiting impacts on the level of aggregate supply in an economy. This would further reduce the ability of the economy to self-correct. In my response I had only considered the demand-based aspect of the problem, however supply would also need to increase in order to improve the conditions – rising supply leads to higher output and a larger proportion of consumers' wants and needs can be satisfied, an attribute of a strong economy.

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  44. Deepa_Johnon 18 Apr 2011 at 12:31 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    With low interest rate being a demand side policy, it gives producers ad loaners an opportunity to loan money at a lower interest rate from loaners to investors. The money that is loaned helps a firm renew their work force, materials, equipment. etc.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Increasing employment is of a higher priority to policy makers than bringing down the inflation rate as it is an easier method to follow and it can be achieved in the short run, whereas inflation can be done during long run. Yes, the fact that it’s an election year does matter because it helps contenders to make a difference and obtain more votes. If the contenders prove that they are capable of reducing problems in a country they will be elected (in this employment and unemployment rates). This allows the government to focus on employment rather an inflation which is a long due process.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this

    year and aren’t inclined to be overly generous in their compensation to

    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    In my opinion we can leave the US economy to “self correct” in times of economic slowdown but supervision will be needed and that is where the government intervenes. At some point firms will want to rehire/ hire new workers and if the economy still continues to be in an economic slowdown it is a loss for the company.

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  45. Deepa_Johnon 18 Apr 2011 at 12:32 pm

    @Abhinav

    I agree with you…Good Answers! :)

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  46. Michael_Mayeron 18 Apr 2011 at 5:29 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    This also increases employment, which means that companies become more efficient or at least their output increases. That is, in other words, a shift to the right in the supply curve. Low interest rates cause this because they encourage people to find jobs.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Because employment is more of a priority to them than inflation rates are. If people lack jobs, they are unhappy and on a macroeconomic level, the GDP decreases. Also, since it is election year, the lower unemployment percentage makes the politicians look better and more proficient. That could play a part in their priorities.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    Neo-classicists say that it will reach a point when the wages get so high that people agree to find jobs, and unemployment goes back to equilibrium. The economy will self-correct, it is just a matter of time. That is not to say that the government should not help out with monetary policies and such.

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  47. Michael_Mayeron 18 Apr 2011 at 5:32 pm

    @Deepa John:

    You did a much better job articulating why interest rates would lead to an increase in employment, and you're right, the equipment would be improved as well, and therefore the efficiency. Good answers, I am glad I read through them!

    -Michael

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  48. Noah Flanikenon 19 Apr 2011 at 1:36 am

    -Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lower interest rates will result in more consumer expenditure but also increase firms’ investment. If firms have to pay less interest they will buy more factors of production and can thus increase aggregate supply.

    -Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Policy-makers would rather bring the level of employment up, especially in an election year, because people think more about the fact that they have a job or not than the fact that they are paying a little more for products. If people have a job they will be happier and complain less about the economy but if people don’t have a job, whether inflation is high or not, they will be more unsatisfied with the economy’s status.

    -“Workers’ wage gains – characterized as ‘modest’ – aren’t raising

    inflation worries. Wary employers have cut jobs every month so far this

    year and aren’t inclined to be overly generous in their compensation to

    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    I think that the US economy will self-correct at some point. It might take a bit of time but at some point firms will have to rehire in order to produce more. Workers’ wages will stop increasing by as much so that firms can start hiring more people.

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  49. Noah Flanikenon 19 Apr 2011 at 1:38 am

    @Deepa John

    I might be misunderstanding your answer to question three but it seems that you are contradicting yourself. If the economy is going to self correct, this would mean that there is no government intervention. Just wondering.

    Noah

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  50. Eleonora_Bisioon 19 Apr 2011 at 12:03 pm

    1. Low interest rates will result in higher investment and more consumption, therefore, the demand of goods and services will increase. Firms and companies will hire more workers to satisfy the increasing demand and workers will be encouraged and motivated to work more since they know that interest rate is low. Therefore, the economy will use its resources to its full potential since use of the factors of production will be maximized. There will consequently be an increase in production that will lead to a raise in the supply that could eventually make prices go down and it can be a further increase in demand and investment.

    2. Increasing employment is a higher priority to policy makers than bringing down the inflation rate because by maximizing the labor force, the production of goods and services will increase and the economy in general will grow. Moreover, by raising the supply of goods, then the prices will consequently fall, resulting therefore in also eliminating the initial state of inflation. Another reason for which employment is a priority is that the government will have to care less on helping services and therefore could invest more money in further education, research or new technologies that could eventually help work and resulting in even more production.

    3. If wages continue to rise even as unemployment rises, then US economy will surely correct in the long run. Now, if we look from a classical point of view, we see that the economy will self correct without any government intervention, whereas from the Keyrsian perspective the economy will never self-correct without any government intervention.

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  51. Mitchell_Broughtonon 19 Apr 2011 at 3:50 pm

    Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    -Low interest rates will increase the investments made by firms. This increases their production potential, and therefore there supply. Also consumers will by more inclined to spend money, increasing demand, which will force companies to hire more workers increasing the supply.

    Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    -It is very difficult for people to live if they do not have a job. Increasing employment would ensure that more people have jobs, making it easier to live through these difficult times. Inflation does similar damage to living standards; however, it is spread out through the entire population of the country since everybody has to pay the increased prices. Therefore the country is focussing more on making sure everybody suffers a bit as opposed to a group of people barely surviving. I do not believe that the fact that it's an election year is impacting the government's decision to do this. This seems like the right idea no matter the time.

    “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    Under the Neo-classical theory the economy would self-correct. In my opinion, the economy would follow this theory in this case. When a firm lowers its wages, some people will be upset and quit, but others will realize that they still would not be able to find a superior job. With unemployment still rising, these unemployed people will be happy to take the job at a lower wage, and employers will be able to higher more people as well. As long as unemployment is at this high a level, wages will remain slightly flexible.

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  52. Mitchell_Broughtonon 19 Apr 2011 at 3:53 pm

    @Eleonora

    I really like your explanation in question 2. You do a great job of explaining how increasing employment will indirectly reduce inflation. I also like your point about how the government will have more money to spend on education and other things that will improve growth and development due to less money being spent on unemployment benefits.

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  53. Frederico_Con 19 Apr 2011 at 6:45 pm

    • Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    If the interest rates are low, then the demand for materials that affect supply will rise, as it is cheaper to invest in them, this increased productivity results in more supply.

    • Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    I would say that un-employment drags more money from the government than fighting inflation, as inflation doe not involve so much money as paying unemployed people a benefit for their food and health. If unemployment is fought off then the government can focus on inflation with greater strength as it has more money to invest. It is fortunate that it is election year, because more people understand unemployment than the concept of inflation, thus it is easier to get the message of a success accomplished via unemployment across than via inflation; sadly it is most likely true that the election year also has an effect on the policy making, but fortunately the right decision was made.

    • “Workers’ wage gains – characterized as ‘modest’ – aren’t raising

    inflation worries. Wary employers have cut jobs every month so far this

    year and aren’t inclined to be overly generous in their compensation to

    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    I believe that it is unlikely, as this double rise makes it evermore impossible to get jobs, and increasingly difficult for unemployed families to purchase any type of good. A breach between the rich and poor is being opened, and if it is left unattended then most likely there will be no correction, as the economy is going two negative ways at once.

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  54. Frederico_Con 19 Apr 2011 at 6:58 pm

    RE: Eleonora

    1. I know what you mean, and that is what I said, but I dont think that the example you used is entirely correct, because you cannot really ask for a loan of employees, perhaps other factors of production will be looked at such as machinery, and also I dont think the average employee would be thinking about interest rates unless they need a loan.

    2. Agreed upon

    3.If wages increase this will cause inflation, at the same time as unemployment, how do you expect the economy to self correct!?

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  55. Jaewan hongon 19 Apr 2011 at 8:26 pm

    1.Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Even though lower interest rates are demand side policy, it also lets suppliers to loan money at lower interest rate from the banks and invest in capital goods such as new technology and new labour skills. Companies will have more money, so they can use the loans to purchase capital goods which will increase total output shifting aggregate supply curve to right. Companies will have more money to spend money on production due to low interest rate.

    2.Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Increasing employment is a higher priority to policy-makers than bringing down the inflation rate because in long run low unemployment rate will get rid of inflation. An election year matters a lot because people will vote for policies that sound good and sweet which is less unemployment.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising

    inflation worries. Wary employers have cut jobs every month so far this

    year and aren’t inclined to be overly generous in their compensation to

    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    It is pretty obvious that this situation is a stagflation which means a period of high inflation rates and high unemployment rate occurring simultaneously. If I were the head of America, I wouldn’t do self correction which I think American government will do too.

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  56. Jaewan hongon 19 Apr 2011 at 8:27 pm

    @deepa

    i think u mistated your thought in 3. If government decided to do self correct then there is no intervention

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  57. Nicole_Sonderegger_Non 21 Apr 2011 at 3:48 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lower interest rates could help promote investment and money borrowing. Investment in technology or new labor skills could help firms become more efficient. By doing so, firms could either produce at lower costs or experience economies of scale and expand production. If this were to happen, aggregate supply could be increased.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Increasing employment rate seems to be of higher priority to policy makers, because maintaining people employed helps keep the economy producing. Perhaps if employment levels are increased, eventually aggregate supply could also increase. An increase in aggregate supply would help lower price and control inflation. The effect of unemployment policies is manifested in the short run, while inflation rate policies take longer to take effect. Because the effect is seen faster, policy makers are more prone to focus on policies which will yield a more immediate effect and satisfy a concerned public. Yes, the fact that it is an election year definitely matters because candidates will want to focus more on unemployment because it is a greater concern than inflation to many. Therefore, candidates will focus on policies which will tackle what appears to be the most concerning problem so that they will gain the public’s support.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    It is very unlikely that the US economy will self-correct when both inflation and unemployment are growing at the same time because prices are only growing higher while more and more consumers’ disposable income diminishes. This means that aggregate demand will only drop lower and lower as there is no force to stir up consumer demand. An economy in such a situation needs government or bank intervention to inject money into the economy or make some changes that will either help lower inflation or increase the employment rate.

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  58. Nicole_Sonderegger_Non 21 Apr 2011 at 3:58 pm

    @Mitchell_Broughton

    Although I agree with

    you that it is always a good idea to focus on diminishing the amount of people without a job, I think that maybe you are forgetting how important public image is to political candidates. If it were not an election year, policy makers might focus a little more on inflation policies because they are not so worried about producing immediate effects. However, because it is an election year, the focus is on making changes that will prove that they are working by producing fairly fast results, such as increasing employment.

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  59. Fabian_MontoyaFendton 24 Apr 2011 at 3:18 am

    Lower interest rates could help promote investment and money borrowing. Investment in technology or new labor skills could help firms become more efficient. By doing so, firms could either produce at lower costs or experience economies of scale and expand production. If this were to happen, aggregate supply could be increased.

    Increasing employment rate seems to be of higher priority to policy makers, because maintaining people employed helps keep the economy producing. Perhaps if employment levels are increased, eventually aggregate supply could also increase. An increase in aggregate supply would help lower price and control inflation. The effect of unemployment policies is manifested in the short run, while inflation rate policies take longer to take effect.

    It is very unlikely that the US economy will self-correct when both inflation and unemployment are growing at the same time because prices are only growing higher while more and more consumers’ disposable income diminishes.

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  60. Fabian_MontoyaFendton 24 Apr 2011 at 3:20 am

    @ Nicole Sonderegger Norris

    completely agree with you and the fact that since its election year then, the candidate will only focus on the short term in order to produce fast positive resultas and this way earn more public support.

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  61. Mehmet_Mert_Sumaon 24 Apr 2011 at 7:26 pm

    “Workers’ wage gains – characterized as ‘modest’ – aren’t raising

    inflation worries. Wary employers have cut jobs every month so far this

    year and aren’t inclined to be overly generous in their compensation to

    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    1. Low interest rates encourage the consumption and the investment. The firms and the consumers become willing to borrow money and spend. The firms can invest in technology or capital to increase their output. Besides, the increase in consumption may be an incentive for the firms to increase their production.

    2. It is important to get the economy to full employment to increase the production. Inflation can be solved easier than unemployment, as well. Interest rates can reduce the inflation rate easily. However, reducing unemployment takes more time and harder to do. Politicians also think that unemployment is a more obvious problem than inflation in the society. So, decreasing unemployment rate would be more beneficial in the elections.

    3. It is so unlikely that the economy will self-correct. Inflation and unemployment are high at the same time. Aggregate demand is low and the government should increase the economic activity by increasing the aggregate demand.

    3.

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  62. Mehmet_Mert_Sumaon 24 Apr 2011 at 7:32 pm

    @Nicole_Sonderegger_Norris

    I agree that the government or the banks should inject money into the economy to reduce unemployment. People's disposable incomes are low and that leads to low consumption. The government should intervene to increase the consumption.

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  63. Daniella_Majlufon 25 Apr 2011 at 12:45 am

    1. Lowering interest rates might result in positive supply-side effects for the economy since doing so could support the stimulation of borrowing money as well as investment. Efficiency is something that comes after investing in new things such as technology (new machines, new ways of producing supply), thus making the firms to be able to experience economies of scale. With new technology firms are able to produce more with less, meaning that they don’t need so many working people so they gain more profits by firing these people and using the new technology.

    2. I think that increasing employment is of a higher priority to policy-makers than bringing down the inflation rate because the more people are employed, the more can a firm be able to produce (if it is the case of no useful or new technology). The higher employment of people is a supply side policy, meaning that it positively affects the supply of the market. Inflation is therefore controlled and prices are kept low or reasonable. Also, unemployment takes less time than inflation to occur, so that is why policy-makers focus on problems that are more closely seen. The fact that it is an election year does matter because unemployment is a greater problem that people face daily every year. Inflation, on the other hand, is something that is seen every other year, sometimes it is low and sometimes it is high, but it affects everyone in general, not only some specific people. The parties that are running for the government will therefore win more votes from the people if they focus more on the unemployment problem rather than on inflation.

    3. It is not likely that the US economy will self-correct in times of an economic slowdown when they are having trouble with both unemployment and inflation. While the disposable income of the consumers decreases, prices increase, thus making the aggregate demand to decrease, too. For the US economy to solve such a problem, government intervention is needed, or bank intervention, too. The bank would help with the money in the economy and by decreasing the unemployment rate, and the government would help by trying to change the inflation by lowering it.

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  64. Daniella_Majlufon 25 Apr 2011 at 12:47 am

    @Nicole_Sonderegger_Norris

    I completely agree with all your answers. I like how you explained that the effect of unemployment policies is manifested in the short run, while inflation rate policies take longer to take effect, therefore policy-makers focus more on the unemployment problem than on inflation.

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  65. tiffany_williamon 25 Apr 2011 at 5:06 am

    1.Lower interest rates can increase investment and money borrowing. Invest in technology, labor skills can be advantages for the firm. Leading to lower cost later on and shifting aggregate supply to the right.

    2. I think increasing employment rate is better off to be a higher priority because in order for the country to keep their productivity high, employees should be employed. This will cause a higher aggregate supply and this can lower down inflation since price will be lower.

    3.The economy will likely never self-correct because this will affect the market. When the cost for labor is high, the quantity supplied will decrease as well as the quantity demanded. This will make the firm has to hire lesser employees and unemployment will rise. economy will probably never self-correct.

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  66. tiffany_williamon 25 Apr 2011 at 5:07 am

    # Nicole_Sonderegger_Norris

    nice explanation and answer :)

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  67. Jackson_Moteon 25 Apr 2011 at 3:46 pm

    Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lowering interest rates would result in positive supply-side effects for the economy because producers would be more productive and effective which would lower the cost of the overall production within the economy.

    Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Increasing employment is a higher priority because the more people that are working, the higher the general economy. Also, since it is an election year, government officials realize that reducing unemployment makes the population happier and more likely to vote for them. Essentially, they are putting themselves over the general welfare of the economy. It is selfish.

    “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    The US economy will not self-correct. The economy will continue to attempt to overcorrect itself which will only lead to worse and worse economic conditions.

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  68. Jackson_Moteon 25 Apr 2011 at 3:47 pm

    @MichaelMayer

    Won't the government just continually attempt to correct itself which will only lead to worse and worse results?

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  69. KangSan Keumon 25 Apr 2011 at 9:55 pm

    1. Lowering interest rates will help increase the aggregate supply as the demand for products will increase. As there are more opportunities for loans and mortgages, people can spend more and thus the consumption will increase. Because the consumption increases, the demand will increase and hence the aggregate supply has to adjust in the long run by shifting rightwards. Additionally, there are more private investment opportunities that will increase the technology output of the aggregate supply.

    2. Increasing the employment is a higher priority because then the people would have money to buy the goods from the market. On the other hand, if the inflation is lowered, people will still have no money to purchase so there is no positive effect on the long run of the economy. It does matter that it is an election year because this action will please the people and earn more votes.

    3. The economy will not self-correct. It will try but it will fail. This actions will cause an increase in separation between the rich and the poor. A higher percentage of people will be poorer and a more exclusive circle will be established for the rich. This will then cause an inefficient distribution of wealth. This in turn, will cause an economic slowdown.

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  70. KangSan Keumon 25 Apr 2011 at 9:57 pm

    @ Jackson Mote

    I do agree with most of your points. However, I do think you could explain more about the self-correction of the economy instead of the economic slowdown.

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  71. Talia_Greeneon 26 Apr 2011 at 9:40 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lowering interest rates would make it cheaper for businesses to borrow money and would encourage investment. The businesses would invest the money in things, such as capital or research and development, that make their company more efficient. This would expand their production ability and increase supply.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Unemployment is a more obvious problem. People are not likely to acknowledge inflation unless it is extreme, as it does not have huge effects on them. Unemployment, however, does have huge effects on people and is more visible, making it more of a concern for voters.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising

    inflation worries. Wary employers have cut jobs every month so far this

    year and aren’t inclined to be overly generous in their compensation to

    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    No, this would likely counter the self-correcting ability of the economy. Wages are the price of labor; higher wages mean that businesses will demand less labor. This will further increase the unemployment, preventing the economy from self-correcting.

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  72. Talia_Greeneon 26 Apr 2011 at 9:43 pm

    @ KangSan Keum:

    I agree with your answers. I think that because of what you said, unemployment is a more visible problem, which helps to make it a bigger concern for voters.

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  73. Haleigh_Eppleron 27 Apr 2011 at 5:29 am

    # Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lowering interest rates result in increased intensives to save and/or borrow money because of the decreased return on savings as well as the decreased cost on borrowing. Increasing profits will be beneficial in the long run when interest rates climb again. The incentive to spend increases a firms investment in the factors of production. Increasing demand for capital in a tertiary business creates multiple levels of increased profits and spending as well as increased jobs. (A trickle down effect.) An increase in jobs is also present at the top, but not as great comapred to the increase further down the line.

    # Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?'

    The fact that it is an election year very much matters. People, who are unemployed and know the government made policy, which left them that way, will not vote for that party/person. An election year is full of making promises and improving the lives of people in the short run (ie before the election.) Increasing employment was a higher priority because those who are employed can better afford the high prices while lowered prices with high unemployment still results in goods which are too costly.

    # “Workers’ wage gains – characterized as ‘modest’ – aren’t raising

    inflation worries. Wary employers have cut jobs every month so far this

    year and aren’t inclined to be overly generous in their compensation to

    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    The economy will self correct as eventually cuts will leave too great a percentage unemployed and create a huge gap between the upper class and the rest of the population. The demand of the upper one percent will not be enough to sustain businesses which will have to cut down on salaries and begin to hire workers who will work for a lower salary than those previously employed. It will be a change in the group of people employed. The extrememly wealthy will continue to spend and be able to find work elsewhere or live on savings for a short period of time. However, the economy will ultimately correct itself. (Perhaps in the extreme long run.)

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  74. Nesibe Z?rzak?ranon 29 Apr 2011 at 8:03 am

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lower interest rate means the cost of money is lower so that leads to increase in cost of borrowing. Investments will rise due to this. As there is more chance for loans and mortgages, people will not save but rather consume; increased consumption. Therefore, it will shift AD to right causing increase in demand in the long run. Also from supply side, since producers will have lower cost of production that will result in more effective and high productive firms.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Increasing employment is of a higher priority is a promise that government makes before elections; lower unemployment is what consumer wants and if it is promised, they will vote for that party. However, in the long run, after elections the policies will talk and promises will be delayed.

    3. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    It is not likely in the long run because wages extend the gap between rich and poor by causing unenqual distribution of wealth. That is a downfall for economy. Also since wages rise, it will trigger a decrease in disposable income therefore increase in prices. That will lead to decreasing AD; growth will fall; economy is not doing well.

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  75. Dilan_Guneson 29 Apr 2011 at 9:16 am

    1.Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    low interest rates are clearly a demand-side policy will increase investment which leads consumption to increase.

    2.Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Increasing the employment rate will be important to policy makers, because the positive sides of reducing unemployment are more visible. In election time the politicians will be looking for some support so this is important during the election times. Politicians are generally making some offers for gaining more votes. They will generally promise for reducing the unemployment rate and by this they think they can get over the recession. Lowering interest rates does not have such an immediate effect.

    3.“Workers’ wage gains – characterized as ‘modest’ – aren’t raising

    inflation worries. Wary employers have cut jobs every month so far this

    year and aren’t inclined to be overly generous in their compensation to

    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    If wages continue to rise even as unemployment rises, it is that the US economy will never "self-correct" from in times of an economic slowdown. We can consider wages as the price of labor in the labor market. When the price of labour increases the quantity of demand will decrease which means the unemployment will continue to rise. So we cannot say that the economy will self correct itself.

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  76. Dilan_Guneson 29 Apr 2011 at 9:17 am

    To Nesibe Z?rzak?ran

    I liked your comment about the third question where you talked about the long run effects.

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  77. Asucan_Odcikinon 30 Apr 2011 at 10:52 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lowering interest rates is very important as it helps promoting investment and increasing money borrowing. Both of them can increase consumption and production. Firms can use the money on technology, labor and capital to minimize their cost and maximize their production. And when consumers can borrow more money they have more ability to spend on goods. So this way consumption which means demand can increase. Also when there is increase in demand it can encourage firms to increase their production as well.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Employment is an important issue because employees are the key of production. So increasing employment means more production which is a good thing for economy. When there is more employment, there will be more demand as people have jobs and get money from it. And also by increasing employment there will be more production. So at the same time there will be both more production and more demand. As there will be an increase in aggregate supply it will also help lowering price and controlling the rate of inflation. So instead of directly bringing down the inflation, increasing unemployment means succeeding two things at the same time: controlling inflation and decreasing unemployment. Moreover, of course it can be seen as an election tactic but I think to develop welfare of a country by controlling inflation and unemployment at the same time is a priority. Because if there is high unemployment, even if there is low inflation rate it means nothing if nobody has money to spend on goods because of unemployment.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    I think it is so unlikely that the US economy will self correct. There is rise in inflation and increasing unemployment at the same time. That means prices are getting higher, whereas people do not have enough money because of high unemployment. So there is very low aggregate demand in the US. In order to fix this, Government should increase demand in the market by some actions like injecting money, increasing employment and trying to lower inflation by some policies.

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  78. Asucan_Odcikinon 30 Apr 2011 at 10:56 pm

    @Dilan Gunes

    As you said, increasing employment is a good way to take attention in election times. But I think it is more than that because it really helps economy to get better by providing an increase in supply and demand at the same time.

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  79. Dogan_Can_Ozcanon 01 May 2011 at 4:21 pm

    1-)Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Low interest rates increase investment. As a result of this consumers will consume more.

    2-)Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    I think this is a good thing for people. Because increasing employement rate means less unemployement rate. There will be less people who aren't working for a job. This situation is good for policy-makers because during election period most of the politicians promise to decrease the unemployement rate. By these promises they can get more votes. They think like this they prevent recession.

    3-)“Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    Wage is the money that one worker takes for his/her job. Actually here we can call wage as price of labor. Quantity of demand decreases as a result of increasing labor prices. By this unemployement rate will be still increasing. Finally if we consider these situations we can say that economy will not be self correcting itself.

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  80. Dogan_Can_Ozcanon 01 May 2011 at 4:24 pm

    @Talia

    I liked your opinions for all questions but in 3rd question if you talked about the quantity demand it would be better but it is still good.

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  81. Melis_Selin_Tatlicanon 02 May 2011 at 8:23 am

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Low interest rates are clearly a demand-side policy increases investment so consumption increases.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Increasing employment is an important policy, because positive sides of reduction unemployment are have an important role. This policy is suitable for government in order to select for new elections because increasing employment rate is the most visible thing in order to satisfy the society. Also with this way it is easy to get over the recession and to fix the economy but not in a long-run.

    3.“Workers’ wage gains – characterized as ‘modest’ – aren’t raising

    inflation worries. Wary employers have cut jobs every month so far this

    year and aren’t inclined to be overly generous in their compensation to

    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    When wages continue to rise, US economy will never “self-correct” from in times of an economic slowdown. If the price of labour increases then unemployment will not stop rising. So the economy will not “self-correct” itself.

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  82. Melis_Selin_Tatlicanon 02 May 2011 at 8:27 am

    To Dogancan,

    I liked your answers to the questions especially your opinions to the 3rd question.

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  83. Ozge_Elif_Ozeron 02 May 2011 at 9:28 am

    1-Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    It is clear that low interest rates are clearly demand-side policy because they encourage people consumption and investment. Since the interest rates are lower, producers will start to loan money from banks and start investing for technology or new capital. This process can be result in more employment so it can decrease the unemployment rate.

    2-Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Increasing employment is of a higher priority to policy-makers than bringing down the inflation rate, because when the employment rate increases, the production will also increase. Politicians also see that unemployment is an obvious problem for citizens, since the party which has more solutions to social problems will be chosen; politicians will give more importance to unemployment.

    3-If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    If inflation and unemployment are high at the same time, it is not likely that the US economy will self-correct. In a situation like that the government should use policies in order to increase aggregate demand, because the rate of it will be too lower.

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  84. Ozge_Elif_Ozeron 02 May 2011 at 9:30 am

    @Asucan, You said unemployment is also a good way of solving economic problems not just for election. But I think that its reasults are visible in the just short-run, to solve economic problems really inflation should be first thing.

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  85. mboadeon 03 May 2011 at 12:24 am

    Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lowering the interest rates result in a positive supply-side effect for the economy because more investors will enter the economy. This new investors will make increment the supply of the economy.

    Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Increasing employment is a higher priority than bringing inflation rate down because if people do not have liquidity to buy products they do not care of inflation.

    “Workers’ wage gains – characterized as ‘modest’ – aren’t raising?inflation worries. Wary employers have cut jobs every month so far this?year and aren’t inclined to be overly generous in their compensation to?workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    If wages continue to rise even as unemployment rise the economy of the country will not “self-correct”. Maybe the demand in the short run will increase but in the long run the gap between the poor, middle class and high class.

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  86. mboadeon 03 May 2011 at 12:26 am

    Hi Ozge_Elif_Ozer, I agree with you I believe that the country should intervene in the economy to shift the aggregate demand of the economy. Some fiscal and monetary policies could be use to reduce unemployment and inflation.

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  87. Merve_Akpinaron 03 May 2011 at 8:21 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    When the government makes interest rates low as a demand side policy which can be stated as contractionary monetary policy, people especially investors will start to get loans from the bank. As a result of that, the investments for education, technology, health will increase. By the help of that the there will be job opening. It makes unemployment rate decrease.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    When we look at the Philip curve, we may see that there is an inverse proportion between inflation and unemployment rate. When unemployment decreases, it is possible to see that inflation is increasing. In the election year, the politicians generally prefer to stabilize unemployment. I mean by stabilization generally decreasing the rate of unemployment.

    3. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    In my opinion, that situation is a bit impossible to take place. Because wages do not rise immediately, while unemployment rate is rising. But let say it happened, it has a government intervention and a supply side policy rather than a demand side one.

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  88. Merve_Akpinaron 03 May 2011 at 8:23 pm

    @ozge elif

    Hi Özge you mentioned a very good point by talking about policies in order to reduce unemployment.

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  89. Bryan_DiLauraon 05 May 2011 at 6:54 am

    - Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lowering interest rates could be considered a supply-side changes to the economy because all businesses borrow money. If the interest rates are lower, that means that the firm isn't spending as much on interest, therefore lowering its costs. Also this idea of lower costs can apply to other things as well, such as government borrowing. This would allow for possibly more investment in education, etc.

    - Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    I think that having people in a job is much more important to policy makers than inflation. This is because if people are unemployed, they are much more likely to be unhappy (because they are bringing in no money, and all of the other negative effects of unemployment such as lower self esteem etc.) than if they just have less spending money than normal. Some money is better than none at all. This makes the policy-maker look really good in the people's eyes. The fact that it's an election year means that candidates will do anything to get every single piece of popularity they can.

    - If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    I don't think so. If wages rise as unemployment rises, that means that there will be an even greater gap between the rich and the poor. Also, unemployment isn't a bad thing all on its own, there are a whole lot of other things attached to it, that can also be detrimental to an economy. Because there are all these people who are out of a job, not only does that mean that they are not paying taxes, but it means that they are likely to be collecting on some sort of social security thing from the government. This in turn means that despite there may be a few people who are better off from increased wages, the economy as a whole will continue on its downward spiral.

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  90. Bryan_DiLauraon 05 May 2011 at 6:57 am

    @Dogan_Can_Ozcan

    Yes, your answer to number one is sort of correct, but there is more to it than that. The reduced interest rates make it so people/firms can borrow without paying as much in interest. That reduces their overall costs, which is what makes it supply-side.

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  91. Huanni_Wuon 09 May 2011 at 12:59 pm

    Lower interest rates could benefit the supply-side because firms would be able to take out loans at lower price and invest in capital goods. This has long-run benefits, as capital equipment constantly needs to be renewed. The efficiency may be improve and therefore an increase in aggregate supply.

    Increasing employment is of a higher priority to the government because the social unrest caused by unemployment is usually more serious than that caused by inflation.

    Yes. The increase of wages would make it even harder for unskilled workers to find jobs. Whereas the educated workers would live better lives. As unemployment rises, wages should go down in order to allow lower skilled workers to find lower paid jobs.

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  92. Huanni_Wuon 09 May 2011 at 1:05 pm

    @masayaechlf09,

    I aggre that there should be increase in flow of information in order to let more people find jobs. However, the larger protion of the unemployed is unskilled workers which do not have the required ability to work for certain jobs. I think devceloping training center is a better way to solve unemployment..

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  93. tomoya_sekineon 09 May 2011 at 6:00 pm

    1. Although the changes in interest rates would affect the demand-side policy, it could also have a benefit and have a positive impact on the supply-side policies for the economy. Generally supply-side policies consist of actions that would reduce barrier for firms to operate in a market and improve the economy (as well as it would also increase the quantity/quality of the factors of production). For example if interest rates are low, firms are able to invest more money to increase output (quantity). As well as they are able to spend money on things such as education and training for their employees to increase the quality of their outputs.

    2. I would strongly think that election year would matter a lot when it comes to things such as unemployment, as people generally want changes or improvements to make things better. If there is a large case of unemployment, people are likely to want change and reduce it. However the main reason would most likely be that problems with unemployment could easily be fixed (in a shorter amount of time), whereas inflation cannot be controlled as easily.

    3. It is very unlikely that the US economy will ever “self-correct” over a period of time when there is an increasing unemployment and inflation chasing the economy, without any government intervention. Either one of the two problems could correct it but that would have disadvantages in many different areas. For example if the US economy were to fix only inflation, which would lead to a decrease in aggregate demand (and again, unemployment would keep increasing and vice versa).

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  94. tomoya_sekineon 09 May 2011 at 6:05 pm

    To: Huanni_Wu

    For your second response, I do agree with you and get your point. However I would not think that unemployment issues are more ‘serious’ than inflation, as you would say. Simply because if inflation rate does become very high, that would most likely be a ‘serious’ issue. I would think that things have to be in moderation more than anything, which would be a very hard thing to do in a situation where both unemployment and inflation is increasing…

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  95. Juan_Manuel_Arguedason 13 May 2011 at 6:26 am

    Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lowering interest rates result in a positive supply-side effects for the economy by several reasons. One of these are that when the interest rates are low, the investors start to invest in what they want. This is because they would like to have the greatest invension, and this would be by first, introducing the invension at a low interest rate, and gaining a lot from it. Then, another reason is that the low interest rates, depending in how low they are, the loses or what you win from it are determined. If the low interest rates are very low, then the loses would be much greater. If the low interest rates are not as low, then what you win won't make a big difference as if the rates were not low.

    Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Increasing employment is of a higher priority to policy-makers than bringing down the inflation rate because you can create jobs in a short period of time. On the other hand, inflation recuires a longer period of time for adjustments due to the fact that inflation measure the overall change in prices for a specific period of time, say one year. It is difficult to decrease inflation because the different markets of the different products can behave in many different ways.

    “Workers’ wage gains – characterized as ‘modest’ – aren’t raising

    inflation worries. Wary employers have cut jobs every month so far this

    year and aren’t inclined to be overly generous in their compensation to

    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown.

    It won't self-correct, there are several reasons of why not. First of all, the people who aren't working don't recieve or have money. The purpose of economy is to maximize the happiness of the people. With this example, it is making happier the lives of some people, but other are not, and the purpose is that everyone achieves it's welfare.

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  96. Juan_Manuel_Arguedason 13 May 2011 at 6:29 am

    @Tomoya:

    I agree with your third point. It's obvious that the US economy will never “self-correct” over a period of time when there is an increasing unemployment and inflation chasing the economy, without any government intervention. It is absurd to think that the economy will self-correct if people are unemployed and not recieving money. This won't maximize the well-being of the people, and the economy's purpose is to maximize the well-being of the citizens.

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  97. Kansu Aydoganon 15 May 2011 at 9:32 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    This will increase employment, which will lead to a shift to the right in supply curve, because of the having more efficiency in companies’ works. This will be caused by low interest rates, because when there is low interest, people will want to have job.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    The election year is definitely an effect of lower unemployment rates, because by this way politicians get votes easily. Plus, if people cannot find a job, then they would be unsatisfied; that’s why GDP will decrease.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    According to the Neo-classicists sayings, when wages get so high that many people will want to find jobs, the unemployment rate will be in equilibrium. As time passes economy will self-correct.

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  98. sophie zhouon 13 Apr 2012 at 3:17 am

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lower interest rates result in positive supply-side effects for the economy since lower interest rates results in more firms to take out loans, buy more products and possibly expand the business. Investments are encouraged by lower interest rate since it leads to expansion in new jobs or technology and leads to an increase in supply. It encourages consumerism and investment in the economy.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Election year matter for policy makers since they will promise to do whatever is popular for the public, which will bring them more votes. What people desire is employment since without employment, it would be hard to make purchases; thus, whether the price of something is higher or lower would be less relevant than having a job. Thus, while decreasing the inflation rate is important to address, increasing employment is a bigger priority in the short run.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    If wages continue to rise even as unemployment rises, the U.S. economy will self-correct from times of an economic slowdown. This is because without self-correction, there will be a great division among people. There would be people with jobs and increasing wages, and those without any income. This then would greatly affect people’s ability to purchase goods available in the market, a negative in all aspects. The government, in theory, should help in times of hardship. When more and more people are unemployed, the government should intervene to correct the economy.

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  99. sophie zhouon 13 Apr 2012 at 3:26 am

    I strongly agree with you about how politicians will sway toward any direction that will bring them more votes and that usually has to do with elements that will positively affect more people.

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  100. cclatworthy2on 18 Apr 2012 at 7:49 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    A decrease in interest rates will increase a firm’s willingness to borrow money in the form of loans. This will allow the firms to purchase more commodities, which will allow them, produce more goods, and other firms will purchase new tools, which will increase their production of services. As a result there will be an increase in the supply. This is why lowering interest rates will result in a positive supply-side effect in the economy.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    I believe that it all comes down to speculation. When the policy makers are implementing a monitory policy, which is increasing the flow of money in an economy, which therefor generates inflation. They will expect the inflation to increase. This will therefor give reason for firms who offer variable wages to not hire employees because it will decrease their revenue. However if there were to be fiscal policy implemented into the economy the consumer may expect there to be an increase in the amount of jobs available due to an increase in aggregate demand, which influences the aggregate supply therefore requiring more jobs in order to create goods and services which will then increase the real GDP. This is more desired by the community for obvious reasons, one of them being that it gives the consumers more spending power. During an election year, the candidates running for presidency will try to win the liking of the community, in order to do so, they will need to provide what the community desire and that would be a fiscal policy. This is why the policy makers prioritize increasing employment over decreasing inflation.

    3. Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    In my opinion I believe that the US government will not self correct. This is because wages will rise as unemployment rises, this will lead to educated part of the economy, the people with acquired skills and a job will receive a high income, however, the lower class; people without an education and therefor few skills will not receive a job and have no income. Essentially, as the richer get richer the poor get poorer. With inflation, there might be a call for an increase in wages due to varied wages, which compensate for the inflation. This increase in inflation will give the poorer part of the community less spending power, which further pushes them into poverty. It is a spiral that is hard to self-correct. However, with government intervention, it can be diverted and/or corrected.

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  101. cclatworthy2on 18 Apr 2012 at 7:52 pm

    Hello,

    This is a great post, I particularly like your response to the third question. The idea of the consumers expecting inflation is a very crucial part concept, because it could lead to people saving their money which therefore reduces the amount of money circling the economy. Which can have some serious effects on the economy as a whole.

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  102. Arthi Nachiappanon 19 Apr 2012 at 10:18 am

    1.Lower interest rates can provide an incentive to borrow money, which could encourage firms to produce more or expand, therefore increasing supply in the economy. It also encourages spending, as there is less return on saving; this could result in higher aggregate demand, encouraging firms to produce more to meet this demand, thereby increasing aggregate supply.

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  103. Arthi Nachiappanon 19 Apr 2012 at 10:20 am

    __2.The problems associated with unemployment can often be more serious, as well as consuming a lot more government money in providing benefits and support to the unemployed – as government revenue is mainly earned through taxes, this can also have a detrimental effect on those who must pay more in direct taxes to sustain the unemployed. All in all, it can negatively affect a large proportion of the population, as well as being likely to have consequences in a negative multiplier effect, possibly leading to lower economic growth. Sacrificing employment to combat inflation can have a knock-on effect on other macroeconomic objectives such as growth, and maintaining a budget surplus.____3.If both inflation and unemployment rise simultaneously, it is unlikely that the US economy can easily ‘self-correct’, as it is likely this will continue in a cycle: workers and trade unions may continue to demand pay rises from fear of inflation, in the hope to keep ahead of it and maintain their standards of living, perhaps then causing firms to lay off other workers to compensate for this rise in their labour costs, therefore leading to higher unemployment. In this way, the process continues.__

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  104. Arthi Nachiappanon 19 Apr 2012 at 10:20 am

    1. Lower interest rates can provide an incentive to borrow money, which could encourage firms to produce more or expand, therefore increasing supply in the economy. It also encourages spending, as there is less return on saving; this could result in higher aggregate demand, encouraging firms to produce more to meet this demand, thereby increasing aggregate supply.

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  105. Arthi Nachiappanon 19 Apr 2012 at 10:23 am

    I didn't think of the technology point you mentioned! That's interesting actually, because it's true if firms earned more revenue, it is likely some will decide to invest this into research and development which could bring about new technology, and eventually benefit productivity and aggregate supply. But having said that, I suppose some research can prove unsuccessful and end up as a waste of time and money.. But this is never known until tried and tested I suppose! This was really interesting to read :)

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  106. skalra2on 19 Apr 2012 at 11:40 am

    1.Low interest rates are clearly a demand-side policy, since they should lead to higher investments and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Supply-side policies encourage supply in an economy. Lower interest rates encourage firms to borrow more thereby increasing investment. Firms are more likely to want to expand, create more output, or introduce a new product when interest rates are low. Also, firms will increase supply in order to meet the rise in demand as a result of low interest.

    2.Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Increasing employment may be of higher priority to policy makers as the increase in GDP will be more apparent. The impact of increasing employment is more immediate than decreasing inflation. The fact that it is an election year matters a lot as it affects the decision-making of the policy makers. The unemployed are also voters and if a candidate gets them a job, they are more likely to vote for him/her. In the short run, increasing employment is more important to run a successful campaign as employment is something voters are greatly affected by in comparison to inflation rate, which takes a long time to settle.

    3.“Workers’ wage gains – characterized as ‘modest’ – aren’t raising
    inflation worries. Wary employers have cut jobs every month so far this
    year and aren’t inclined to be overly generous in their compensation to
    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    I do not think that the US economy will be able to ‘self-correct’ itself if wages continue to rise even as unemployment rises. This kind of situation will only add to the increasing gap between the rich and the poor. The increasing number of unemployed will increase welfare costs while cutting government tax incomes. The situation is also detrimental in terms of sociology – the unemployed can develop angst against the employers. They may feel that the money that used to keep their job is now being used to increase the pay of someone already well off. Increasing unemployment is both detrimental to the economic growth and development of a country.

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  107. skalra2on 19 Apr 2012 at 11:46 am

    @Nesibe Z?rzak?ran
    I agree with what you said about the significance of it being an election year. Promises made by candidates are evaluated with scrutiny during these times putting pressure on the candidates to uphold them.

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  108. lgade2on 20 Apr 2012 at 8:51 am

    Low interest rates are basically demand-side policies aimed at increasing Aggregate Demand. This has positive effects on the supply-side of the economy; as with the increase in Aggregate Demand comes an increase in consumption. This increases the revenues of the firms, and allows them to invest in capital; increasing production.

    Employment is likely to be a higher priority to policy-makers than inflation; especially if its an election year. This is because the unemployment rate is perhaps seen, by voters, as a more important issue. Despite the fact that inflation affects everyone, the extent to which it will affect people will be less than an increase in unemployment. Therefore, the country's policy-makers may decide to focus on increasing employment rather than decreasing the inflation rate; as it will likely have a better result in increasing the well-being and happiness of the average voter; therefore increasing the probability of being re-elected.

    If wages continue to rise as the unemployment rate rises, the result will be a simultaneous rise in the inflation rate and the unemployment rate. This problem could right itself, as the inflation rate would eventually decrease as consumption decreased. However, the unemployment rate wouldn't decrease; and in this case government intervention would be necessary.

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  109. lgade2on 20 Apr 2012 at 8:55 am

    Hey,
    I thought that your response to the last question was interesting. I also agreed that the government should intervene in order to correct the situation of unemployment, but also stated that the inflation rate would likely be self-corrected.
    I also agree with your answer to the second question; regarding the short-term priority for policy-makers to reduce the unemployment rate over the inflation rate.
    Thanks

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  110. Allan Gramachoon 20 Apr 2012 at 12:28 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lower interest rates result in positive supply-side effects for the economy since lower interest rates results in more firms to take out loans, buy more products and possibly expand the business. Investments are encouraged by lower interest rate since it leads to expansion in new jobs or technology and leads to an increase in supply. It encourages consumerism and investment in the economy.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Election year matter for policy makers since they will promise to do whatever is popular for the public, which will bring them more votes. What people desire is employment since without employment, it would be hard to make purchases; thus, whether the price of something is higher or lower would be less relevant than having a job. Thus, while decreasing the inflation rate is important to address, increasing employment is a bigger priority in the short run.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    If wages continue to rise even as unemployment rises, the U.S. economy will self-correct from times of an economic slowdown. This is because without self-correction, there will be a great division among people. There would be people with jobs and increasing wages, and those without any income. This then would greatly affect people’s ability to purchase goods available in the market, a negative in all aspects. The government, in theory, should help in times of hardship. When more and more people are unemployed, the government should intervene to correct the economy.

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  111. Allan Gramachoon 20 Apr 2012 at 12:31 pm

    I agree with you

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  112. rpuri2on 20 Apr 2012 at 7:58 pm

    1.By lowering interest rates, positive supply side effects in the economy can result as firms borrow from the banks as well. Low interest rates will encourage firms to borrow and invest in the capital goods. Using the borrowed money firms may invest in greater employment of factors of production such as capital and labour thus increasing the supply in the economy.
    2.The fact that it’s an election year does matter. Government parties try to appeal to the public by promising certain objectives. One such objective is reducing unemployment, which is desirable for the public as it increases the per capita income. Thus by tackling unemployment, the government can buy votes from the public. Tackling inflation on the other hand will not have as great as an impact on the consumer’s decision in voting.
    3.It is unlikely that the US economy will ever “self-correct” from times of economic slowdown. This is because firms fire people due to increasing costs in difficult times and increases in wages increases the cost. Thus to counter the increasing cost, they will fire more thus creating a never ending cycle. As a market failure is created, it is for the government to intervene and correct the issue.

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  113. rpuri2on 20 Apr 2012 at 8:01 pm

    Nice responses. In contrast to you I feel that the US economy will not self correct as it will create a never ending cycle in terms of cost and reducing cost for producers. Don't you feel that if wages continue to rise with unemployment that means there is an increase in cost for producers (through rising wages) and to counteract that they will increase unemployment?

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  114. lzhang2on 20 Apr 2012 at 9:11 pm

    1.Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    Low interest rates encourage businesses to borrow money to invest, as borrowing is cheaper.
    More investment results in the increase amount of production, and in order to produce more, businesses need to hire more people to expand the production.
    2.Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    Increasing employment make people feel more secure. People at least have some money in hand to purchase goods and services when they are employed. Whether the price is high or low does not matter if people do not have sources of income. In an election year, the policy-makers will go to every end to address the issue of unemployment. In a short run, employment is more important than low general price levels.
    3.“Workers’ wage gains – characterized as ‘modest’ – aren’t raising?inflation worries. Wary employers have cut jobs every month so far this?year and aren’t inclined to be overly generous in their compensation to?workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    During economic slowdowns, firms will try to cut the costs and firing employees will be one attempt to cut labour costs. When people are unemployed, the national consumption will decrease resulting ultimately in a lower price level. Government needs to intervene giving incentives for the economy to hire people so as to reduce unemployment.

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  115. lzhang2on 20 Apr 2012 at 9:13 pm

    Thanks for bringing your knowledge by indicating that lower unemployment results in higher GDP as the economy is more productive. For the election issue, you mention that unemployed are also voters and they will vote for the policy-makers who address their employment. Great job!

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  116. Anair2on 21 Apr 2012 at 8:59 am

    1.Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    When interest rates are decreased, business investment and consumer expenditure will in fact increase, essentially firms and individuals will feel more inclined to invest or consume as cost of taking loans decreases. Positive supply-side effects such as increases in productivity do occur because with increased investments made by firms into the factors production, an increased output is a definite result. Another view on how lowering interest rates result in positive supply side effects is that as I previously stated consumer confidence will increase and thus also consumer expenditure increases. This tells producers to produce a greater amount to satisfy the demand therefore output increases this represents another positive supply side effect in relation to demand-side policy.

    2.Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Policy makers definitely keep the goal of reducing unemployment to a higher priority than bringing down the inflation rate a lot of the time. Unemployment is an issue that most of the population directly realize as oppose to inflation. With regards to many nations, unemployment is something the everyday individual wants to end; a household without a job is horrific for them rather than an increase in the prices of food. In the election year, both political parties aim to steal the votes by winning the hearts of the population. When doing this, increasing unemployment is something the population wants far greater reducing inflation. So increasing job opportunity is definitely something individuals desire greatly and thus policy-makers put it in higher priority especially during election year.

    3.Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    The situation is quite bad with both unemployment and inflation increasing at the same time; this is a situation that is crucial to policy-makers in which they must decide inflation or unemployment what is worse. The possibility of self-correction becomes quite difficult however looking at the situation theoretically both the Keynes’s and Hayek’s show that the AS should always reach a point where full employment takes place through self correction of course. However looking at it from another viewpoint it seems as though self-correction is not possible however with government intervention it may be possible to stop this issue. As unemployment rises, it is generally the low-income classes and the unskilled labor force that lose their jobs and thus with high inflation they face even greater issues and end up in poverty. One solution may even be to increase interest rates as it is quite strong in fighting inflation, self-correction is very difficult to occur but government intervention is definitely a valid method in solving this issue.

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  117. ichoi2on 21 Apr 2012 at 10:48 am

    1. Low interest rates are clearly a demand side policy, since they should lead to higher investment and consumption. But lowering interests, in some ways can result in positive supply-side effects for the economy. For instance, lower interest rates are very likely to encourage investment. Through investments, the firms can allow themselves to be able to produce more, and thus bring up the supply level. Also, as investments become more accesible, people will spend more and thus demand becomes higher along with consumption. With higher demand, spending consumption, this will stimulate the supply line and thus supply level will increase.

    2. I think increasing employment is of a higher priority to policy makers than brining down the inflation rate, simply because people are less concerned of inflation (could be an indirect concept to people) than unemployment (more of a direct concept that results in immediate consequences). Unemployment seems like a more apparent, direct concept to people and because people are naturally inclined to be more interested in avoiding the rising unemployment, government sets its priority to suppressing it before taking care of inflation. Especially if election is taking place, then the candidates would want to make sure they have positive reputation among the voters. If unemployment is of a bigger concern among voters, then they would especially want to make sure they tackle unemployment first.

    3. If wages continue to rise even as unemployment rises, I think it is very unlikely that the US economy will ever "self-correct" from in times of economic slow down. Unless either one improves, self-correction looks almost impossible. If wages keep rising, then unemployment will only get worse. Now, this is one of those times that government intervention is crucial. An option could be that governments could provide jobs, or they could also provide subsides to firms to increase employment.

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  118. ichoi2on 21 Apr 2012 at 10:53 am

    Hey!
    I think you have similar opinions to what I have written down!
    First of all, the reason why you think increasing unemployment is of a higher priority to policy makers than bringing down the inflation rates, was very interesting to look at! Though we had the similar ideas, the point that you raised about those being unemployed are also part of the population of voters was very interesting! that will definitely impact the result of the election greatly.

    For your answer in number 1 though, I wanted to make sure about a point. You are saying that increase in investments always result in increase in demand?

    Thanks!

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  119. Jianfeion 21 Apr 2012 at 4:11 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    Lower interest rates encourage higher consumption and investment where it can contribute to an increase in output, increasing aggregate supply and reduce inflation. While increasing output, an increase in productivity is needed, thus unemployment rate also decreases, which results in an overall positive effect.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    While bringing down the inflation rate gives more consumer confidence, increasing employment boosts the economy directly. When the inflation rate is lower, the consumption might increase, but there is also a possibility that it will not, as it depends on the firms and consumers. When employment rate increases, it directly affects, increases, the output, and can bring the positive supply-side effect to the economy where it lowers the inflation rate at the same time. Therefore, increasing employment is of higher priority than lowering inflation.
    As for elections, it is crucial that the policy-makers choose the option with the best outcome, therefore, I would believe that an election year can have some effect on the choice.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising
    inflation worries. Wary employers have cut jobs every month so far this
    year and aren’t inclined to be overly generous in their compensation to
    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    I believe rising wages and unemployment would lead to a decrease in productivity, thus the US economy will not 'self-correct' the wages and unemployment rate. It would need to depend on the government to correct the economy, increasing the unemployment rate even if there is no increase in inflation.

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  120. sjowett2on 22 Apr 2012 at 12:28 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lowering interest rates will encourage investment and borrowing from the bank. This can further increase investments in technology and labor skills which could in its turn decrease the level of unemployment. It will also shift the aggregate supply curve to the right.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Unemployment has huge effects on people and is very visible as they are in some cases suffering to live, making it more of a concern for voters than inflation, where prices are simply going up. Yes it does, since the unemployment level is so high, all the unemployed will vote for policies which will decrease unemployment. However, all of those who are guaranteed jobs will be against this, and for lowering the inflation rate instead.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    I think it is so unlikely that the US economy will self correct. The US are in a very tricky situation as they are suffering from both increasing levels of unemployment and increasing inflation, and trying to fix one will directly worsen the other one. In order to fix this, Government should increase demand in the market by some actions like injecting money, increasing employment and trying to lower inflation by some policies. In my opinion, they need to do it slowly and and a very controlled manner, and pay perfect attention to not worsening one too much as they fix the other problem!

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  121. sjowett2on 22 Apr 2012 at 12:30 pm

    Hey nice post! For the third question, i agree with the fact that the US economy is not correcting itself. They are in a very tricky situation as they are suffering from both increasing levels of unemployment and increasing inflation, and trying to fix one will directly worsen the other one. In my opinion, they need to do it slowly and and a very controlled manner, and pay perfect attention to not worsening one too much as they fix the other problem!

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  122. ssewellon 22 Apr 2012 at 1:35 pm

    1. Low interest rates may have positive supply side effects, because firms will be more willing to invest in more capital and land if the cost of borrowing is lower. This will increase their output, so aggregate supply will increase. Firms may also choose to invest in better quality factors of production e.g. better capital, training for staff, which will also increase output.

    2. Low unemployment is a most severe problem because it will cause a fall in economic growth, as disposable incomes decrease. It will also have a greater effect on individuals, whereas inflation is not always a problem if incomes rise at the same rate or a similar.

    3. Even if wages continue to rise, it is unlikely to self-correct the US economy. This is because the extra income from wage increase is unlikely to be as great as the loss of income from unemployment, so incomes will most likely decrease overall. Also, if employers have low confidence, they are unlikely to increase wages significantly.

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  123. ssewellon 22 Apr 2012 at 1:48 pm

    As you point out in question two, I agree that the upcoming election is a major factor affecting government choices; they want to resolve the problems which will put them in a good light, and voters are more concerned with enumployment. However, I do not think this is purely selfish, reducing unemployment is in the interests of both individuals and the economy as a whole, as it will help economic growth to recover.

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  124. nvirani2on 22 Apr 2012 at 9:12 pm

    1. Lowering interest rates may causes more people to invest in companies and use loans from the banks. This will increase output and therefore create more jobs for people who are jobless.
    2. The fact that it was an election year most definitely had an impact on the choice to choose unemployment over inflation. This is because unemployment effects many people directly. Making the people happy was important to win over the votes of the people.

    Although some theories tell us that economies will self correct, in the case of the US, it is unlikely. Government intervention is necessary as most unemployment rates and the inflation rate of the country is rising. The consumer confidence is extremely low at this time making changes and self correction hard for the economy.

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  125. bhejaichon2on 22 Apr 2012 at 9:14 pm

    1.) Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    - Lowering interest rates is very important as it helps promoting investment and increasing money borrowing. Both of them can increase consumption and production. Firms can use the money on technology, labor and capital to minimize their cost and maximize their production. And when consumers can borrow more money they have more ability to spend on goods. So this way consumption which means demand can increase. Also when there is increase in demand it can encourage firms to increase their production as well.

    2.) Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    – In an election year, people are more likely to vote for the party that implements significant change. This change has to be something positive that the voters can feel the affect of, which therefore makes the voters automatically more receptive to social change. By decreasing unemployment, the government can help the people who are suffering most those without jobs. While decreasing the inflation rate is an important issue to address as well, increasing employment is a higher priority in the short run, especially in an election year.

    3.) “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    - If wages continue to rise even as unemployment rises, the U.S. economy will self-correct from times of an economic slowdown. This is because without self-correction, there will be a great division among people. There would be people with jobs and increasing wages, and those without any income. This then would greatly affect people’s ability to purchase goods available in the market, a negative in all aspects. The government, in theory, should help in times of hardship. When more and more people are unemployed, the government should intervene to correct the economy.

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  126. nvirani2on 22 Apr 2012 at 9:16 pm

    Hi!
    In question one, I agree that the lower the interest rates are, the more chance that people will want to invest, therefore creating more jobs.
    In addition, in question three, when both unemployment and inflation are growing, it is unlikely for the economy to self correct. Government interevention is necessary. Thanks!

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  127. bhejaichon2on 22 Apr 2012 at 9:19 pm

    Hey,
    i agree with all of your answer in regards to the following questions. the increasing amount of unemployment is of a higher priority to policy makers than bringing down the inflation rates, was very interesting to look at! Though we had the similar ideas, the point that you raised about those being unemployed are also part of the population of voters was very interesting! that will definitely impact the result of the election greatly.

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  128. alifsigridardottiron 23 Apr 2012 at 2:13 am

    1.Low interest rates are clearly a demand side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply side effects for the economy?
    When there is high consumption and aggregate demand increases, it leads to greater confidence in both consumers and producers and the producers may become more productive and feel more inclined to spend money on investment, and overall this could lower the costs of the factors of production within the economy. If consumers feel confident, usually that leads to producers/firms feeling confident too and vice versa.
    2.Why do you think increasing employment is of a higher priority to policy makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    The methods the government would need to enforce in order to bring down the inflation rate are generally very unpopular to the public, and the government might be especially hesitant to do so if there is an election year coming since their greatest wish is to get re-elected. This is not good, as the government might decide to put their own desires in the short run before the best interest of the economy in the long run. Lowering the unemployment rate on the other hand, doesn’t include many negative side effects to the public; therefore the government isn’t risking any negative reactions by focusing on that, rather than inflation, which is a problem that should be addressed as well.
    3.Workers wage gains – characterized as modest – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid a general pullback in hiring the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever self-correct from in times of an economic slowdown?
    If wages continue to rise along with the unemployment rate, then it is very unlikely that the US economy will be able to self-correct. In spite of theories that have claimed otherwise, history has shown that government intervention is necessary during periods of high inflation and unemployment. If the government doesn’t intervene the economic condition will only worsen.

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  129. alifsigridardottiron 23 Apr 2012 at 2:17 am

    Hi Haleigh_Eppler, I found your post very interesting, and I was surprised to see that you think the economy will be able to self correct. History seems to suggest that government intervention is necessary during times of high inflation and unemployment. It's probably not in the best interest of the society to wait for the extreme long run, haha, that could cause a lot of damage and lower the living standard of a large amount of people. I think you could have mentioned how increasing interest rates in order to lower inflation can prove to be a very unpopular solution to the public. This lowers the living standard for many people because they will have less spare income, whilst lowering the unemployment rate is a win win situation for everybody. Your post was very different from mine, but it was definitely interesting to read!

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  130. Stefan Jon 23 Apr 2012 at 3:43 am

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lowering interest rates are crucial for reflationary purposes and can have as stated, both demand and supply-side effects. Ofcourse, decreasing the amount of money needed to borrow prompts producers to take advantage of the situation to create a competitive business. The lower value of money will likely lead to borrowing higher quantities of money that firms could use to improve their factors of production such as improved technology. This has great effects on the supply of goods as they can be produced more efficiently. This allows the firm to have an advantage as their cost of production would lower and they could sell their supply at a lower value. An example of this would be the price of a McDonalds meal vs. a small local fast food's meal. Lastly, lower interest rates would allow the firms to sell at a lower price as they would not need to cover the cost of high interest rates.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    I believe that this a straightforward question with the answer that employment is a more important factor than lowering inflation as no one will even have money to spend. Secondly, in a time of low employment, I doubt that there would be high inflation due to lack of aggregate demand. During an election year, these are perfect factors to lure voters in your favour as employment would be a major point of interest. Increasing employment would be the first problem to tend to as it would stimulate the economy and raise production and demand to more favourable levels. Following this, only would inflation become a point of interest as aggregate demand might reach higher than expected levels due to the increased consumer consumption.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    Well, seeing as we are now in 2012, the data does show that during 2009-2010 that there seemed to be a "self-correction" that allowed the US economy to increase its GDP and regain a more stable unemployment rate. Though, I believe that consumer confidence has been the major issue that has lead to lowered demand. With speculation of a near-futured recession, investment has scared of many people. Also, with the stimulus packages that allowed employment to rise, the distribution of it has been a problem. The article said that wages are rising even though unemployment does the same. It seems that the money that is supposed to support the unemployed has gone to the wealthier top few percent, causing the issue of income-inequality.

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  131. Stefan Jon 23 Apr 2012 at 3:47 am

    I definitely agree with you about the self correction issue. Just making sure, when the article states that wages and unemployment are rising, is it hinting to the problem of income inequality? I believe that the government intervention has not helped as much as planned as it seems that an increasing amount of income in the circular flow is somehow going into the pockets of the top few percent. Do you agree?

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  132. ahamdockon 23 Apr 2012 at 9:11 am

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lowering interest rates is very important as it helps promote investment and increase money borrowing ,both of which, can increase consumption and production. Moreover, firms can use this money on technological advances, labor and capital to minimize costs and maximize overall production. Also ,concerning the borrowing of money; when consumers are free to borrow more money they have a greater ability to spend more money on goods. So this way consumption ,which also doubles as demand, can increase. Also when there is increase in demand it can encourage firms to increase their production as well.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Increasing employment is an important policy, because the positive side effects of reducing unemployment rates are quite clear; and subsequently have an important role in the cognition of policy makers. These policy changes , that visibly reduce unemployment rates, are good because ,apart from making strides towards reducing the effects of recession, they provide hope for the society, because employment rates are quite clear and when they are reduced it is an evident change.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    I think it is rather unlikely that the American economy will self-correct itself, because not only are there high inflation rates, but there are also high unemployment rates. This means prices are continuing to augment, while people do not have enough money because of high unemployment. So there is very low aggregate demand in the US. In order to fix this, Government should increase demand in the market by some actions like injecting money, increasing employment and trying to lower inflation by some policies.

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  133. ahamdockon 23 Apr 2012 at 9:15 am

    I like answer to number 1, you did very well to first define what is meant by "positive supply-side effects", and then to give examples of them. Well done!

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  134. mmartinsonson 23 Apr 2012 at 10:01 pm

    1.My opinion is that employment is the priority number one because by simply reducing the inflation rate it will not change a lot in the country if the unemployment rate is still high. The more people are working the more aggregate demand grows, more people start consuming more products and services, which means more money flowing into the economy, which leads to an extra money to invest in other weak spots of the economy. This issue is directly related to elections, if it is true what some people say, that politicians tend to lead their countries in a recession before elections in order to have something to improve and something they can promise to improve, and promote themselves in front of the whole country as heroes who are going to change the current situation.
    2.Lowering interest rates even lower than 2 % would result in positive supply-side effects in a way that, firms will be willing and they would be able to borrow more money for induced investments and this would cause a surplus in supply and that would just cause an increase in inflation. However companies might be able to sell that surplus to government for stocks. However in general I think that lowering interest rates it just stimulates firms to borrow more money, there is more access to money therefore it is more likely that investments will increase and therefore there is a chance of an increase in economic growth and decrease in inflation, increasing employment.
    3. According to business cycle, long-term trend yes it will self-correct. Question is how? The rising wages just make it more difficult but at one point it will hit the ground and go up into the recovery stage. This is all part of the cyclical unemployment, there will be a point where firms will realize that they need more workers therefore they need to stop increasing the wages and they might even lower the current wages. If we look at it from other point of view, then I do not think that companies can rise the salaries infinitely at one point they must stop increasing their salaries and that is the point when they will hit the floor and start recovering.

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  135. mmartinsonson 23 Apr 2012 at 10:09 pm

    You make a good point in first question I totally agree with you and I like how you have simply explained it.
    However the last question, I think you got it wrong, well at least I disagree, because first of all as business cycle says and it has proved that in long- term it will self- correct. Another argument is that think realistically for how long can firms increase wages? it cannot be forever at one point they will realize that they are too high and they will stop increasing wages.

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  136. mmartinsonson 23 Apr 2012 at 10:14 pm

    Good point made there in first question ,however in second question, do you think that unemployment is priority just in short- run? Well it is at the moment, but do you think that it should be a priority in long-term as well or you think inflation would be more important in long-term?

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  137. tdeol2on 24 Apr 2012 at 2:51 am

    1.Lowering interest rates will and can act as a supply-side policy. A SSP is basically a policy that causes a change in the LRAS. This usually happens when there is a change in one or more factors of production – land, labour, capital, entrepreneurship. When interest rates decrease, the cost of borrowing decreases, then firms can invest more in the FOP’s like labour and land, and therefore they can grow. This would cause an increase in production and therefore shift the long run aggregate supply curve.

    2.Ideally it is important for an economy to have low inflation rate and low unemployment rate. I think that having people in a job is much more important to policy makers than inflation. This is because if people are unemployed, they are much more likely to be unhappy. Bringing down inflation rates will not be the most important policy because inflation rates actually signify a growing economy and therefore I do not think policy makers or the government will tackle the problem of inflation unless it is very high. This policy is suitable for government in order to select for new elections because increasing employment rate is the most visible thing in order to satisfy the society.

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  138. tdeol2on 24 Apr 2012 at 2:55 am

    Hey ahamdock,
    I really liked reading your responses to the questions, I felt like there were very detailed and interesting. I agree when you said that reducing unemployment would be the issue that policy makers would tackle first, with or without elections as it has serious ramifications to a household and also that it helps reducing effects of recession. I also think that inflation can sometimes be a sign of a growing economy and therefore the policy makers will not be as worried about it, what do you think?

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  139. anair2on 24 Apr 2012 at 5:25 am

    You took an interesting perspective towards the first question stating that inflation itself will lead to borrowing higher quantities of money to then improve factors of production. Therefore firms can then sell at a lower price as the profit would be maintained with interest rates being dropped. The idea however I agree with as on the whole output will increase as a result to satisfy the demand. Where the second question is concerned I agree with you and the fact is that when dealing with a country like the United States, inflation for a great deal of the population is not noticeable however employment is. However don’t you believe that drop in Aggregate Demand is a result of inflation? As for the last question it was interesting how you brought statistics, I did not really think self-correction would occur but I definitely agree that governments should employ policies such as fiscal stimulus packages so as to help the economy.

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  140. ctoantran2on 24 Apr 2012 at 8:58 am

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lowering interest rates would decrease the cost of borrowing, so firms would be more inclined to borrow money for investment. While this would increase demand for capital goods (and thus increase aggregate demand), it would also mean a gain in capacity for production due to the new capital put in place by the investment. This increased capacity for production would mean an expansion of the nation’s PPC or a movement right of its LRAS curve.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Employment is a tangible factor for registered voters. Most people won’t care about the status of inflation rates if they don’t even have a job. The current government would be most focused on pleasing its citizens in order to garner as many votes as possible for good performance of the economy (which people will understand mainly in terms of their own prosperity, which they need a job for).

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    In the short term, increased wages means an increased cost of labor, so unemployment will remain high as employers are unwilling to hire workers at a high salary. However, in the mid to long term increased wages means greater aggregate demand, which should close the deflationary gap with consumer demand. This would then stimulate investment, and the demand for labor should increase. Then the economy should have “self-corrected” itself back to stable economic growth.

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  141. ctoantran2on 24 Apr 2012 at 9:04 am

    I'm interested in your reply to the second question. Do you think that people would also be concerned enough about rising costs of living due to inflation to vote accordingly? Could this come into conflict with the desire for decreased unemployment? For example, if the unemployment rate is 10%, wouldn't the other 90% (who are employed) be more concerned about costs of living than unemployment? Would the government do better vote-wise to pander to this interest than to the unemployed (who are often young people who fail to vote anyway)?

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  142. odorrityon 24 Apr 2012 at 9:40 am

    1) Lowering interest rates encourages investment in banks due to the greater availability of low-interest investment schemes; it also leads to higher consumption as less interest needs to be paid on goods.
    However, there can be supply-side effects of lower interest in the form of increased borrowing power of individuals. Businesses and individuals would be more inclined to borrow money, as they would have to pay back less over time. This borrowed money could be used to increase productivity in firms, allowing them to produce more goods or provide them at a lower price. This would increase the supply to the community and again encourage higher consumption.

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  143. odorrityon 24 Apr 2012 at 9:41 am

    2) Increasing employment would allow, in the long run, for an increase buying power in the community. Although prices would likely still be higher than average, the presence of more wage-earning individuals would mean that over time consumption would increase, gradually starting to correct the economic problems encountered. Higher numbers of employed people would increase the amount of tax revenue collected by the government as income tax, allowing for increased government spending in areas that would be most beneficial.
    The fact that it is an election year has some significance. It could be argued that increasing the number of available jobs is a way of raising morale and increasing the popularity of certain candidates. While prices will still be too high, people will see employment as a positive and be more inclined to vote for the party who provided their jobs.

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  144. odorrityon 24 Apr 2012 at 9:41 am

    3) It is unlikely that a combination of rising wages and rising unemployment will result in self-correction in the short run. Although firms are saving money by laying off jobs, they will have to pay out more to their remaining employees, resulting in little savings being actually introduced. If firms are still spending the same amount of money on employment they will have little opportunity for economic advancement in other areas.
    However, it could be said that the increased wages of the remaining employed would gradually have an effect on the economy, as they would have more disposable income to inject back into the circular flow. Despite this, the large numbers of unemployed would likely counteract this improvement. The way I see it, it would be incredibly difficult for an economy to self-correct in a situation where both wages and unemployment are rising.

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  145. nick mindorffon 24 Apr 2012 at 2:21 pm

    1) Lowering interest rates is indeed a conscious demand-side policy, but does have effects that can be classified as supply-side. This is when more investors and those looking for a loan approach the bank, and thus, the overall rate of investment is increased.

    2) I think that this can certainly be an election strategy, as I'm sure people would rather have jobs in a poor economy instead of no jobs in a stable economy. That being said, it is clear which is better for the economy. However, it is unlikely that people will be able to see past the fact that a good economy means their temporary unemployment.

    3) If the current pattern prevails, I doubt that any self-correcting action will occur. The further the same path is followed, the less likely it is for the market forces to take over. All that can happen now is a gradual increases in the Gini coefficient.

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  146. iyang2on 24 Apr 2012 at 2:33 pm

    1.Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    Low interest rate will lead to higher investment because businesses will be able to take money at a low rate. The low interest rates might result in positive supply side effects for the economy because the payments individuals must make from their income will decrease; therefore, consumers will have more disposable income to use on other supplies in the economy that can be distributed throughout the various markets in economy. This will overall increase the aggregated demand in business and consumers alike.
    2.Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    When employment rate is increased, the most beneficial group will actually be the majority of workers. Policy makers are emphasizing their priority on employment because they want to target these majority of workers who will support him or her. Also, when employment rate increases, the circular flow of income will be more efficient, more wages will be spent by workers and the money would be put back into the economy. By targeting the common populous with employment problems, rather than inflation rate, policy makers aim to win the vote of the majority that plays a major role in the elections.
    3.“Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    The current economic slowdown in America will not naturally “self correct” itself. As inflation rates are increasing as well as unemployment rates, both the workers and firms are not contributing to the cause. They simply don’t know how to stop the increasing rates of unemployment and inflation, and the economy of America will collapse before it can self correct itself. I believe that in order to fix the problem, government intervention is necessary. The government should have a firm control on the markets, and it should work on balancing out the aggregated demand and aggregated supply so that the inflation rate decreases as well as the unemployment rate.

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  147. iyang2on 24 Apr 2012 at 2:49 pm

    You do not have enough evidence supporting number 3. How exactly will it "self-correct"?

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  148. iyang2on 24 Apr 2012 at 2:52 pm

    So how do you think the problem with number 3 should be corrected? According to your statements, it won't self correct itself.

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  149. kedwardson 24 Apr 2012 at 2:57 pm

    @lyang2

    I find it very helpful how you mentioned the efficiency of the circular flow of income model. That is crucial to the consumer spending aspect of the economy, which is also affected by unemployment. Connecting that flow of income to the increase in wages which comes from an increased employment illustrates the connectedness of the macroeconomy. Thanks!

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  150. kedwardson 24 Apr 2012 at 3:03 pm

    Lower interest rates will not only increase the aggregate demand of a nation, but businesses and firms in that macroeconomy will see more investment & consumer spending, which is more money coming in to the company that can be regenerated into an increase in production. It implies a general decrease in the costs of production and therefore an increase in supply.

    Increasing employment is more of a target because of the positive results. It will make the population happier because those seeking jobs will find a job to help sustain their life and support their families if that is the case. Also, when there is less unemployment, there is less crime and protest because people are busy working. That is positive for the election because of less people with time to thoroughly oppose the campaign. Also increasing employment shows potential voters that an individual can already change the nation through employment, and can be used to gain votes. Unemployment directly causes an unsatisfied population who will complain and bother policy-makers more, than if there is a little inflation.

    Wages increasing are not the only concern to a macroeconomy as a result of of unemployment. In fact, this unequal distribution of work, larger wages for a few and none for more, is causing a higher unemployment than wage rate. Since the wages cannot keep up with the employment situation, there cannot be a “self correction” as the cycle will continue. Government intervention is really the only short-term solution to receive positive tangible results, because the government and policy-makers are the only ones to have authority to change the cycle.

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  151. Vickyon 24 Apr 2012 at 4:30 pm

    Do you think that the reason unemployment is chosen is only because of the election? Should we look at things more objectively and consider factors that employment is what that would start to raise people's standard of living and leads to a better lived next generation.

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  152. Vickyon 24 Apr 2012 at 4:40 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    By lowering interest rates, aggregate demand will be increased. Which includes investment. When investment increases, the quantity and quality of goods that a country can produce also increases. This results in a final outcome of a shift to the right of the LRAS curve, or the PPC.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    I think the fact that it is an election year matters, but only to a certain degree. Apparently, people who are voting for them are people, and they need jobs. By reducing unemployment, those people benefit and feels happy about it, which contributes to the votes.
    But from another point of view, if unemployment is solved, people can live better lives and provide better lives for the next generation, causing living standards to increase.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising
    inflation worries. Wary employers have cut jobs every month so far this
    year and aren’t inclined to be overly generous in their compensation to
    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    When wages rise, people have less incentive to hire people, as the cost increases. This will lead to less people being employed, raising unemployment. However, since the wages are high, supply of workers will rise too. A rise in supply increases the wages further, ending up in a vicious cycle. Hence, in my opinion, the government should interfere to stop this vicious cycle for carrying on and on.

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  153. dnyanzion 24 Apr 2012 at 6:40 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    In lowering the interest rate borrowing becomes cheaper, this will affect consumption and investment and hence increase aggregate demand. Positive supply-side effects will mostly be created through investment (supply-side effects result in a shifting of the LRAS and so also the potential output.) Through increased investment in education and health sectors the labour will become healthier and more skilled shifting the LRAS curve. The increased AD can lead to investment in new technology and in infrastructure again having a positive supply side efffect.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it's an election year matter?

    The level of employment is more relatable to the public than the rate of inflation, as many people may not even notice if there is an increase inflation, whereas if there increase in unemployment voters may want to elect for other politicians. Most voters want to be able to have an income and a job.

    3. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever "self-corrrect" from in times of an economic slowdown?

    The US economy is unlikely to self-correct at the stage of increasing wages and unemployment combined with high rates of inflation. The increase in wages will be good for the few that are still employed but since many are unemployed this just widens the gap between the rich and the poor. The government will need to step in by using demand side policies, there is however likely to be a trade-off and the government would need to decide which is more important, low inflation or low unemployment.

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  154. dnyanzion 24 Apr 2012 at 6:57 pm

    @nvirani
    Regarding question 1, I would add that increased investment in education, healthcare and new technology would have a positive supply side effect as this would increase the quality and quantity of the factors of production and shift the LRAS curve to the right, increasing the potential GDP.

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  155. Konstantin Frankon 24 Apr 2012 at 7:56 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    The lowering of interest rates can only affect the supply – side indirectly. The increased willingness to invest and consume due to low interest rates will boost the Aggregate Demand. Producers will recognize this and increase their production, which will lead to an increase in Aggregate Supply. Therefore, monetary policies can address the supply side, but only indirectly.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    From my point of view, the fact that it is an election year plays a very important role. People who do not have a job tend to be unsatisfied with their government. A high inflation rate isn't good as well, but voters are more likely to support the ruling government once again when they have a job and are not unemployed. However, generally speaking I think that there is no more important or less important when comparing the macroeconomic outcomes. One might argue that a low unemployment is more important, because people are wasting their resources and a mental pressure is put on them. However, with a high inflation many industries will suffer as well, which will cause again unemployment. A balance between all outcomes needs to be found.

    3.“Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    I think that a "self-correction" is really unlikely in this case, as both macroeconomic aims, a low inflation and also a low unemployment aren't met and are working against each other, pushing the other one.

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  156. Konstantin Frankon 24 Apr 2012 at 8:01 pm

    However, the situation is that wages are rising, though many people are unemployed – therefore I suppose that, now matter which degree of education – something is going wrong and the system will not rectify itself without help from outside.

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  157. Emily Kaminskion 24 Apr 2012 at 9:35 pm

    I really like how you explained how lowering interest rates can affect supply as well. It is true that over time since businesses do borrow money that they would be able to expand their business and have a greater output. When the interest rates are lowered more people and businesses are willing in invest and borrow money by loans/bonds in which over time they can slowly pay it back.

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  158. Emily Kaminskion 24 Apr 2012 at 9:56 pm

    3. I believe that it is highly unlikely for the economy to self-correct itself. Unemployment levels will continue to rise so the majority of the country’s wealth is coming from the workers who are getting those wage gains. Eventually the companies will not be able to give gains out because the economy is so tight from all of the unemployment. There are unemployment checks sent out to a lot of the population which is government money. Eventually there will be a point where wage gains stop, but the unemployment rates will probably continue because the government is not evening them out. There is no way this problem can fix on its own. For the economy to fix itself one of the two factors must change.

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  159. Emily Kaminskion 24 Apr 2012 at 9:56 pm

    2. Increasing employment would be higher priority because the consumers will eventually, in the long run have a larger disposable income they will want to use to spend on goods and services. This will benefit the economy because it will boost demand and supply. By increasing the employment it also encourages workers to have more faith in the economy and want to invest. I believe that since it is an election year it does matter because if more people have jobs than more people are happy with a higher standard of living. They are more willing to vote on a candidate for improving employment levels. The people who have employment would be more confident that the government is helpful for bringing up unemployment.

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  160. Emily Kaminskion 24 Apr 2012 at 9:57 pm

    1. Lowering interest rates would have a positive effect on the economy in that both consumers and businesses would be more willing to borrow money and buy bonds. This will increase the demand of bonds etc. This would impact supply for a business because with the loan they are able to spend more money on enhancing it and possibly getting more workers. With the more efficient business and more workers a larger output of goods or services will occur. The same goes for the consumer in that after they borrow money the demand for certain products will increase because they now are able to afford them. The pressure is then put on the companies to have a larger output (supply) to support the increase in demand.

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  161. ryilmazon 24 Apr 2012 at 11:15 pm

    •Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    oLow interest rates don’t only stimulate consumers spending but also firms’ investment. As this means that firms improve the quality and/or quantity of their factors of production this surely has a positive supply-side effect.
    •Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    oPeople are more aware of unemployment as they usually are more negatively affected by it. Especially when there is a high unemployment rate, politicians can use this problem very well to earn peoples sympathy.
    •“Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    oAt least this situation will slow down the process of self-correction severely, but I think that it is very unlikely that it will self-correct. Even if it does, this will have a very negative effect on society as it will let workers be better off but the chances for unemployed aren’t good, they might end up in poverty, hence, it will widen the gap between wealthy and poor. The best solution would be a government intervention.

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  162. ryilmazon 24 Apr 2012 at 11:24 pm

    I agree with you on the first two questions, I think that you did a good job answering them, however I disagree on your final answer as I don't think that it is possible that the unemployment rate and inflation rate can grow simultaneously in the way in which you described it. This idea doesn't match with the fact that inflation and unemployment have an inverse connection.

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  163. Jianfeion 24 Apr 2012 at 11:31 pm

    For your answer in #2, I would say that unemployment concerns about workers when inflation is the price. The price levels change because of the wealth and the views of the consumers who are the employed workers. Thus I believe that workers are easier to 'manipulate' than the prices, as prices are affected by consumers.

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  164. klake2on 25 Apr 2012 at 12:42 am

    1: Low interest rates are clearly a demand-side policy, since they should lead to higher investments and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lowering interest rate is a demand side policies that will want to increase aggregate demand therefore it as a good impact as if aggregate demand increases then consumption increases too. And if consumption increases people will have more money to produce more.

    2: Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s that it’s an election matter?

    It will have a role on the election for sure. Policy makers will try to make the community happy more than what the government wants. It’s a sort of strategy, but at the same time if unemployment increases more and more people will not have enough money to buy goods and services, therefore the government will have to intervene and give financial help. The government spending will increase as unemployment increase. So it is not only a matter of elections.

    3: ‘’Workers wage gain – characterized as ‘ modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pull back In hiring’ the fed said. If wages continues to rise even as unemployment rises, is it likely that the US economy will ever ‘’ self-correct ‘’ from in times of an economic slowdown?

    If wages continues to rise as unemployment rise at the same time, I believe that the US economy will not self correct at all. This because some people will gain a lot of money, and will not have any problem in they life living, but in the other side people which are unemployed or have really low wages will have problems In buying themselves things to eat or necessary in life. And if wages becomes higher therefore the poor people will have less chance to get a job, as they will not be qualified enough.
    Also it means that the poorer people will need government support, therefore government spending will increase and they might decide to put taxes on rich people’s wages. Of course rich people will not be happy.

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  165. rthornton2on 25 Apr 2012 at 2:22 am

    1.Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lowering interest rates may result in positive supply-side effects for the economy because lowered interest rates would encourage firms to borrow more money, because it is cheaper, and investment would increase. These investments could be put towards increasing the capacity to produce goods, therefore, resulting in positive supply-side effects for the economy.

    2.Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    I think that increasing employment is an election strategy to gain more popularity amongst the public. Without the employment rate being higher, no matter how high or low the price of something is (level of inflation), people would not have the income to purchase these goods, therefore, the economy would feel the extreme effects of the recession and the current economic situation.

    3.“Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    I believe that rising wages will further add to the problem of unemployment. With unemployment continuing to increase, as well as wages, I do not think that the US economy will ever “self-correct” from this economic slowdown UNLESS there is a change in wages for workers within the US.

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  166. rthorntonon 25 Apr 2012 at 2:25 am

    Regarding your second answer, do you think that lowering employment is more or less beneficial than lowering inflation? Do you think that the general public shares your opinions?

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  167. zbrounson 25 Apr 2012 at 8:00 am

    1.Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lower interest rates can encourage firms to invest in more capital, therefore increasing their capacity for production and increasing production itself. Increasing production also increases aggregate demand, which in turn increases the supply.

    2.Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Yes, the fact that it is an election year does play a part in this. Policy-makers and politicians need to base their policies around the statement that unemployment is a more urgent problem. Because it is such a stressful time for many of these people, it is important now more than ever to lower unemployment to make their own administration look good, even if inflation is really the more pressing matter.

    3.“Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    The US economywill probably not “self-correct” because of the stagflation, or economic stagnation at play here. As wages and unemployment continue to simultaneously rise, the wealth gap will increase and both problems will be inflamed.

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  168. simona cajkaon 26 Apr 2012 at 4:06 pm

    Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    Lower interest rates will act as an incentive for firms to take loans, invest into capital and overall increase production. Consumers will likewise be encouraged to spend more and perhaps take loan, which will lead to increase in demand and as a result increase in supply.

    Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    Decreasing unemployment is somewhat the more human thing to do. People will note the change more drastically unlike with lowering inflation. The change also affects people directly, and providing someone with a job gives them something to do, and they can feel like someone does care. This is why, especially during election year, unemployment is targeted.

    “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    It is very unlikely that the economy will ‘self-correct’ its self if both wage and unemployment rise at the same rate. It basically means that those with job are getting paid more and more while the unemployed are staying unemployed and multiplying. It only widens the gap in the economy, and the population becomes separated between people who are not doing anything basically because they cannot act as a normal consumer, since they have little or no money to spend, and then there is the other side of the population who are able to spend. The problem is just enhanced.

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  169. simona cajkaon 26 Apr 2012 at 4:10 pm

    Hi Catherine, yes, I definitely agree with your answers. I'm very impressed by the last question especially, I liked the mention of the Keynesian economy and I think you are right, it would work better. Regarding the second question, I think very similarly but do you think that when it is not election year, the government would act the same, or would they focus on lowering inflation?

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  170. axu2on 27 Apr 2012 at 12:51 am

    Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    Low interest rates encourages firm to invest more loans. It works as an incentive. Which would all increase production.Thus, increases consumer's spending, taking loans thus increases demand and supply.
    Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    From my perspective, in each election, people would most likely to vote for the party that most benefits them personally. By decreasing unemployment rate, would certainly benefit majority of the population. Increasing employment is a high priority in the short run, i think, especially in an election year.
    “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    I think raising wages is not a so good idea when comes to unemployment, I believe that it would increase the difficulties of solving the problem. I don’t think the US economy will “self Correct” because of the continuation of simultaneously rise of unemployment.

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  171. axu2on 27 Apr 2012 at 12:59 am

    Hello,
    For question number three, you stated that "due to increasing cost in difficult times and increases in wages increase the cost, thus to counter the increasing cost.." This sentence did confuse me. Because of the increase in cost therefore it resulted in thigh wages. So, which one do you think costed which?

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  172. Monique Ton 27 Apr 2012 at 3:30 am

    1.Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    When interest rates are lower, it means that firms are usually able to loan more money from the bank, meaning they have more to invest into the production of products. This allows the productive capacity of the economy to expand, because firms are able to produce more.

    2.Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    Increasing employment is of high priority to policy makers because, with the unemployment rate as high as it is, many citizens are unhappy. People notice unemployment more than inflation, because when someone has no job it is a bigger shock to them (not only financially, but also mentally) then when the prices of goods and services increase; this means that policy makers have a greater desire to decrease unemployment in order to appease their citizens. In addition, unemployment rates being at a high mean the economy is not running at its capacity, and the goal of the policy makers is to ensure their economy is running to the best of its ability, so they attempt to solve this problem. And yes, I think that it being an election year does have an effect: policy makers know that people are more upset over unemployment than inflation, and so they want to solve the problem that will make them look best around election time (A government who reduces unemployment is highly favourable to votes, as opposed to a government reducing inflation).

    3.“Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    It is possible that, as unemployment rises, consumption falls (people have less income), and so prices will begin to fall in the long run, leading to inflation being partially corrected. However, the problem of unemployment will still remain. Overall, it is very difficult for the economy to work towards self-correction, and so government intervention is needed, at least, to get the ball rolling and begin to fix the problem.

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  173. Monique Ton 27 Apr 2012 at 3:39 am

    Hi lzhang2,
    You raise a really good point about how employment makes people feel secure. I think that security is probably one of the most important reasons as to why people care more about employment than inflation: they know that if they have a job, they have the ability to deal with financial issues in some way, while without a job they feel helpless. Also, I like your point about cutting costs in economic slowdowns; firms need to cut costs and so they may fire people, which will just create economic troubles – meaning there will be a cycle that is difficult to stop, making government intervention necessary. Thanks!

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  174. Jessica Kennyon 28 Apr 2012 at 8:22 pm

    1.Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Perhaps indirectly by increasing AD, lowering interest rates can increase the economy’s productive potential because firms earn higher profits, which they can reinvest in hiring more workers (an increase in the quantity of labor) or providing better training to workers (an increase in the quality of labor). These would be positive supply-side effects because it signifies an increase in LRAS, although this would be a long-run consequence that would take time to kick in. Meanwhile, in the short-run, lowering interest rates would gravely induce inflation because of increased AD without a corresponding increase in AS.

    2.Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Because people can deal with higher inflation by spending less, even though this may pose a severe drop in general living standards. On the other hand, unemployment, despite not affecting every single person in the economy like inflation does, can have even more severe consequences because the unemployed cannot afford anything and present a high cost to the government in social security benefits in addition to contributing nearly nothing to AD – because they can’t buy anything, only receive free goods! The election factor certainly matters because candidates can get people’s votes by appealing to their needs. If the unemployed are at greatest need, then they’ll vote for the candidates that promise to prioritize their situation.

    3.“Workers’ wage gains – characterized as ‘modest’ – aren’t raising
    inflation worries. Wary employers have cut jobs every month so far this
    year and aren’t inclined to be overly generous in their compensation to
    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    No, it is not likely that the economy will self-correct, because normally, wages should decrease as the supply of labor (unemployment) increases. If the opposite is happening due to interventional action from labor unions or the government itself, then inflation will rise as goods become scarcer, and the only way to correct this is with government intervention. As goods become more expensive, in times of an economic slowdown when AD is already low, the economy is unlikely to recover by itself.

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  175. Jessica Kennyon 28 Apr 2012 at 8:34 pm

    Regarding number 2: I agree that addressing unemployment seems a more urgent matter. Inflated prices affect more people, but less drastically than unemployment, which affects less people, but more severely. Politicians often times aim to strike their voters' emotions (I believe pathos is the strongest appeal among the uneducated masses), so it makes sense that they'll address the more painful issue in an election year, when their own careers depend on the public's approval.

    Regarding number 3: I agree that Keynesian or interventional policies are necessary to fix the situation, but only because government intervention in the form of minimum wages and labor unions created the problem of wage stickiness in the first place. I'm not arguing for monetarists or Keynesians here, but in this specific topic it's important to assess what caused the problem as much as what's the best solution.

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  176. Mirren Mecathumon 01 May 2012 at 7:04 pm

    1.Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    Lower interest rates allow firms to borrow a higher amount from the bank. As such, they can increase the output of their firm as they can now increase the factors of production from the higher amount of money they have. An increase in the output of the firm increases its efficiency and thus ensures the expansion of productive capacity.
    2.Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    The fact that it’s an election year definitely matters as policy-makers want the power that they currently have to remain. As such, they would increase employment as this would more directly affect the voters and the more it gives a positive outcome to voters, the more voters would still vote for the pocily-makers to be re-elected.

    3.“Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    In my opinion, I don’t think the US economy will ever self-correct from in times of an economic slowdown as, firstly, unemployment does not only result in an increase in wages. There is a larger and more concerned situation at hand, which is the bad distribution of work rather than the wages itself. The only way the US economy can be corrected is if the government intervenes. However, this is only short-term.

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  177. Mirren Mecathumon 01 May 2012 at 7:09 pm

    Hi Kedwards,

    I liked your response to the third question and how you explained the entire situation as a cycle rather than a situation with a domino effect. It does make sense that in the cycle there is no way to stop it unless an external factor, in this case, the government, intervenes.

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  178. Nadiya Son 05 May 2012 at 5:42 pm

    1.Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    When intrest rates drop, this means that firms can borrow more money from the bank, they can then use this money to invest in their products and the efficiency of thier production, this can cause the aggregate supply to increase overall

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  179. Nadiya Son 05 May 2012 at 5:42 pm

    2.Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    Policy makers put employment as a higher priority becasue it affects the majority of the population a lot more than inflation, or at least it seems to the public like unemployment is worse. Not having a job is a lot more detremental, than higher prices. The majority of people would rather deal with inflation while having a job, rather than not having a job and not having inflation. Unemployment leads to disatisfaction in the citizens, and that can have a negative impact on the policy makers…especially since it is election year…because the people that are going to be elected, are the ones who promise to battle unemployment first, they are the ones who will be more popular.

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  180. Nadiya Son 05 May 2012 at 5:43 pm

    3.“Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    As unemployment climbs, the level of demand will decrease because people will have less income to spend, however this will also cause prices to start to decrease, thus inflation will be on the way to being solved, but that still leaves the problem of unemployment which will require government intervention in order to be fixed.

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  181. Nadiya Son 05 May 2012 at 5:47 pm

    Hey cclatworthy :)

    I think you make a good point in your response to question three…the rich will get richer and the poorer will get poorer but not exactly in the way that you described it. There will always be a demand for jobs for people with less education…unemployment will affect all tiers of society and there will be as many educated unemployed people as there will be uneducated unemployed people…
    But as you say at the end, government intervention is needed to correct this problem.
    Nadiya

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  182. Samantha Kimon 07 May 2012 at 4:07 pm

    I agree with all of your responses and I especially liked your response to the second question where you focused more on the election year matter. However, I feel as though you could have expanded on question 3. I agree that it is government intervention that is needed, but I do not think that government intervention is only needed to get the ball rolling, but throughout the entire economic process itself. If government policies were only used at the beginning it is likely that a similar situation will occur later down the road. Governments always need to be aware and ready to intervene in the economy to make sure recessions are prevented or at the very least do not last long.

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  183. Samantha Kimon 07 May 2012 at 4:13 pm

    1.Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    Lowering interest rates will have a positive effect on supply-side aspects of the economy as it is not just consumers that will be able to invest or borrow money. Producers could also borrow money from banks in order to acquire the raw materials that they need and then provide these goods to other producers or consumers who may need this product at a reasonable price. Producers could also increase employment and provide jobs allowing these employed to consume more goods and further contribute to the economy.
    2.Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    Increasing employment is of higher priority to policy-makers than bringing down inflation rates because it does not matter how low the interest rate is if these people that can actually take advantage of these rates are unemployed to begin with. No money will be lent to those that are unemployed no matter what the interest rate and people who have already borrowed money will be unable to pay back the interest rates no matter how low they are if they are not employed. It definitely matters that it is an election year for rising unemployment implies that the voters are unemployed. These voters will be more concerned with increasing employment than interest rates that they would feel are catering only towards the rich.
    3.“Workers’ wage gains – characterized as ‘modest’ – aren’t raising
    inflation worries. Wary employers have cut jobs every month so far this
    year and aren’t inclined to be overly generous in their compensation to
    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    If wage continue to rise a unemployment rises it is unlikely that the US economy will ever “self-correct” itself. This would simply result in high-wage job increasing and low wage jobs decreasing even more. This would also create a greater gap between rich and poor and present even more devastating consequences for the economy. The number of consumers would also continue to be further and further limited.

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  184. aaxler2on 13 May 2012 at 10:31 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    1. Low interest rates provide a greater opportunity for businesses and individuals to receive loans. Loans allow producers to put funds back into their businesses allowing supply to grow. An infusion of funds from an affordable business loan would allow a company to do any number of supply boosting things including employee training and education and increases in research and development
    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    1. Employment is far more tangible to the average citizen. While most people have a sense of inflation, because of experiences with things inflating like balloons, the nuisance of it is lost on most ordinary people. Additionally, uninformed observers might feel richer from inflation because their income is likely to rise and their debts are easier to pay off. Policy makers, with the exception of the Federal Reserve leadership, are nearly always elected. Unemployment is unsavory to voters, and most politicians wish to be reelected. Thus, they focus on increasing employment in election years.
    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    1. It’s unlikely that the US economy would self correct because the increase in wages could be a result of inflation. While Keynesians for many years, stood by the Phillips curve which illustrates that as inflation increase unemployment decreases, relatively recent economic situations have resulted in “stagflation” where there was at once an increase in unemployment and inflation. This results in little to no actually economic growth leaving the US in the doldrums However, the US economy has never really been left alone in times of economic hardship, so from a historical perspective it is difficult to determine what the potential result might be.

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  185. aaxler2on 13 May 2012 at 10:43 pm

    I agree with you that increasing employment is a much higher priority to policy makers than lowering inflation. Your discussion of interests rates is interesting from an American perspective, because interest rates are never a campaign issue because they are not set by elected officials. In your country do elected officials set the interest rates? I'm not sure that no money is ever lent to unemployed people. I think that unemployed people often pay some of the interest rates on borrowed money because they are forced to get loans from places, like pawn shops and credit cards. Perhaps, this an issue that would come up on the American political stage in terms of interest rates.

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  186. Aaxler2on 13 May 2012 at 10:49 pm

    I agree with you that the US economy is unlikely to self correct. I'm not sure you meant to say that unemployment results in increased wages, but I think I know what you meant. If the US economy is able to diversify its national employment opportunities to decrease unemployment it may be able to get itself out economic turmoil. This would reduce reduce the bas distribution of work you brought up. Much in the same way FDR"s New Deal infrastructure expansion helped revive the economy by providing jobs. This of course is highly contentious practice of deficit spending and would cause Hayek to roll over in his grave.

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  187. stakon 02 May 2013 at 1:20 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    - It is not only the firms who are willing to invest that borrow the money from the bank, but also the suppliers will be more encouraged to borrow money and expand their supply

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    - The rise in inflation rate is not as noticeable as unemployment rate to the people, given that their wages also increase accordingly. It is definetely related to the election in the following year because the policies that decrease the inflation rate affects the unemployment and thus are highly unpopular. So the policy makers who want to be re-elected are better off decreasing the unemployment

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising
    inflation worries. Wary employers have cut jobs every month so far this
    year and aren’t inclined to be overly generous in their compensation to
    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    - I don’t think that the US economy will self-correct. The recent researches show that the trade-offs between unemployment and inflation rate are proven to be wrong as stagflation is happening in a number of countries, where both inflation and unemployment rate rise at the same time. So in my opinion, unless the government, or the central bank, does something about it, the economy won’t recover by itself

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  188. stakon 02 May 2013 at 1:21 pm

    - It is not only the firms who are willing to invest that borrow the money from the bank, but also the suppliers will be more encouraged to borrow money and expand their supply

    - The rise in inflation rate is not as noticeable as unemployment rate to the people, given that their wages also increase accordingly. It is definetely related to the election in the following year because the policies that decrease the inflation rate affects the unemployment and thus are highly unpopular. So the policy makers who want to be re-elected are better off decreasing the unemployment

    - I don’t think that the US economy will self-correct. The recent researches show that the trade-offs between unemployment and inflation rate are proven to be wrong as stagflation is happening in a number of countries, where both inflation and unemployment rate rise at the same time. So in my opinion, unless the government, or the central bank, does something about it, the economy won’t recover by itself

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  189. stakon 02 May 2013 at 1:25 pm

    # aaxler

    I completely agree with your answers. I have the same point of view as you for the last question especially, saying that the economy is not likely to “self-correct”. You also had an interesting view on how the firms could spend the money that they borrowed from the bank to train and educate their employees, which would create a positive externalities in the society

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  190. cameron7on 03 May 2013 at 8:54 am

    1. Lowering interest rates can result in positive effects for the economy because it will mean that firms can afford to take out loans and invest in capital goods. It will create higher demand for loans and increase in consumption, where this can be positive since the firms will be supplying a lot to please the high number of demand, therefore maximizing their profits and their revenue to make more money. The loaned money can then buy new technology, new labor skills, and allows for more workers which can decrease the unemployment rate.

    2. Increasing employment is of a higher priority to policy-makers than bringing down the inflation rate because solutions to increase employment are more visible and will happen a lot faster than dropping inflation, which would take a longer time. As we know, the economist Phillips had a theory of the trade-off, meaning that decreasing unemployment and inflation simultaneously in a nation was impossible, that the government had to choose to create policies to decrease one where the other would unfortunately have to increase. Also employment is of bigger concern because unemployment causes the government to place higher unemployment benefits to please the people hence they would lose money along with the fact that there are a lot of people who are not working. It is in the better interest of the government to decrease unemployment that inflation. The fact that it is an election year matters because the candidates will find solutions that appeal more to the voters, and in this case, decreasing unemployment would be it. Unemployment is something that all voters would like to see solved and will vote for the candidate that puts more priority to this. Therefore, the government will be focused on this first and will deal with inflation later.

    3. The simultaneous rise in interest rates and unemployment rates is known as “stagflation.” It is not very likely that the US economy will ever “self-correct” itself because with the rise in prices of goods and services comes people’s inability to consume them and expecting a rise in their wages to match the inflation rates, causing a vicious cycle. People would be making the same amount of money from their pay-checks but the price levels of goods/services will increase. It would be very difficult for the economy to correct itself in this situation and some form of government intervention will probably be needed.

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  191. cameron7on 03 May 2013 at 8:59 am

    #stak

    Good answers, I thought they were concise but accurate. I just have to add something for your answer to the first question, where I do agree with you,but additionally, it will create higher demand for loans and an increase in consumption. This will have the firms making more money since they are going to be supplying a lot to please the high demand. Therefore, they will be maximizing profits and revenue, which can ultimately cause them to expand their firm and decrease unemployment.

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  192. nikolay@pamojaon 03 May 2013 at 8:07 pm

    1. low interest rates would allow firms more freedom when attempting to increase their factors of production thus increasing their supply capabilities.
    2. I believe that employment is more important to policy makers as the population believes that employment is more important. The fact that it is an election year does matter greatly. Basically the primary motive for a politician is to please as may people as possible, if that means decreasing unemployment then that is what they will do. One could also make the argument that the increase in price of living is not as bad as the increase of people who cannot afford to live at any price. But then on the other hand if price of living continues to increase no one will be able to afford living even if everyone is employed.
    3. If wages continue to rise, and unemployment continue to rise, then nothing would self correct because at the end there would be no one employed or one person with a wage that is the GDP of the USA. But assuming the question means is it a good idea to increase the wages of certain employees while others are being fired? The answer is no, however one could just have a chat with Keynes to understand that wages are sticky on their way down, and sometimes are so sticky that they move up despite it clearly not being the time for that.

    @#cameron7
    I like how you added such depth to the answer you were replying to while still focusing on the asnwer and providing constructive criticism. Just a wonderful responce.

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  193. lannison 04 May 2013 at 6:40 pm

    1.Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    It is true that low interest rates are a demand-side policy. This increase in demand would result in firms be able to loan money and to purchase long term benefiting capital goods such as newer technology, equipment, labour. All of these resulting in a positive supply-side effect.

    2.Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    As stated in article, consumers are the life blood of the economy. Without the consumer, the economy fails. We can only have consumers if they have money that they can spend, and to receive money they need a job. Thus, employment is the foundation for successful economies. Inflation can then be targeted later on by implementing fiscal policies. An election year would matter. Many ordinary people think the unemployment is the biggest issue, and there are millions of unemployed Americans. If a presidential candidate were to focus his/her campaign on employment, he would most likely win the votes of those unemployed and those who believe unemployment is key.

    3.“Workers’ wage gains – characterized as ‘modest’ – aren’t raising
    inflation worries. Wary employers have cut jobs every month so far this
    year and aren’t inclined to be overly generous in their compensation to
    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    I can’t say that the economy will ultimately correct itself into a state of equilibrium, however, it would help itself. Since prices are becoming to high and there are many people with jobs (thus have no money to consume goods), the demand for goods would decrease. This would subsequently lower the price of the goods. As people begin consuming again, the firms would need to compensate for this increase in demand by hiring more labour workers, decreasing unemployment.

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  194. lannison 04 May 2013 at 6:50 pm

    #Monique T

    Great answer to question 1. It was short and right to the point. It didn’t go around the question using unnecessary details and vocabulary.

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  195. clundon 06 May 2013 at 1:10 pm

    1. By lowering the interest rates firms will be more likely to invest in new factors of production, like new machines or increase the labor skills of their employees to become more efficient or simply just employ more (which will decrease unemployment). This will lead to an increase in output and move the aggregate demand curve to the right and will therefore lower the price level.
    2. He fact that it’s election year definitely matters –it’s no incidence that the business cycle in general last 4 years. When people vote they choose the candidate who will improve their lifestyle the most, so to focus on lowering inflation will not only make you loss the unemployed votes but also increase this group of people, which is a bad strategy if the policy-makers want another round which they normally do.
    3. I think that it’s unlikely that the US economy will self-correct after it has interred this dark spiral. By keep un raising the wages the business pushes up inflation, which mean that their cost of production will increase as well, which will force them cut jobs. If this rise in wages is the primary course of the inflation it’s quite likely the government who will have to stop it since the employed won’t agree on having their wages lower/locked while prices are still increasing. This could be difficult though because of labor unions which will try to fight against the government policies such as price wage ceilings.

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  196. clundon 06 May 2013 at 1:24 pm

    #cameron7

    Hi Cameron, your answers are good and detailed. Just something to think about: what will happen to the aggregate supply curve at the situation that you very well described in 1?
    For 3, why could it be that the government hadn’t done anything about the stagflation yet (maybe something to do with sticky wages) and what could they do?

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  197. skangon 06 May 2013 at 6:47 pm

    1.
    -Low interest rates result in people borrowing more money from banks. As a result, they have more cash and demand increases. When demand increases, people want to fill that demand and thus supply increases, bringing about positive supply-side effects for the economy.
    2.
    -Depending on the election year, increasing employment’s priority can change. All policy makers do not want to lose their jobs and as a result they realize that public sentiment is very important. Unemployed people are unhappy people. Unhappy people will not vote for incumbents.
    3.
    -It would not correct itself because eventually, everyone would be unemployed and thus the economy would slow down even further.

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  198. skangon 06 May 2013 at 6:48 pm

    # nikolay@pamoja
    I agree with your answer to 2. The population believes that unemployment is more important than inflation and as a result, policy-makers will work to combat unemployment more than inflation in order to keep the public happy.

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  199. nwarneron 06 May 2013 at 7:24 pm

    Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    By lowering the interest rates firms will invest more in factors of production such as new machines or increased education for the labor to increase their skills to create more efficiency. This can lead to an increase in output of the product that is produced which will cause the average demand curve to shift to the right thus lowering the price.
    Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    Employment is a more important consideration for policy makers as unemployment tends to have a more negative effect on individual workers than inflation does. This is amplified if it is an election year as the workers and people will determine the election. Since high unemployment is more unpopular than high inflation the politicians would try to solve the unemployment at the cost of inflation. Also the consequences of unemployment tend to be more visual than the consequences of inflation. For example, a person living on the street starving and struggling to feed themselves than the loss of competitiveness of domestic industry. However, depending on the political ideology the reduction in inflation could be viewed as more important.
    “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    It is likely that the market will self-correct. As wages rise even if unemployment is falling than the aggregate demand of the economy will raise this will cause prices to rise. This inflation if you follow the Phillips curve than you’ll believe that the high inflation will lower the unemployment. Personally I believe that the high prices will cause there to be high profits which if there are limited regulations the businesses will invest to increase operations which will slowly create new jobs. The economy will then return to the full employment.

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  200. nwarneron 06 May 2013 at 7:24 pm

    # lannis
    I like your answer to the second question. It is very detailed and describes the economic and political consequences well. I agree that politicians focus on getting the work of the unemployed. However, I disagree that if you fix unemployment than you can control inflation through fiscal policies. I think that at its core the inflation rate is difficult for the government to control besides through the control of the fiat currency. Therefore it is hard for a politician to control the inflation rate as the central bank can normally better control the inflation rate.

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  201. jyoungon 06 May 2013 at 11:30 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lower interest rates can encourage investment by firms in their own factors of production leader to newer equipment, technology, and efficiency, resulting in more output by individual firms and more aggregate supply at the same or lower price level.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Unemployment is seen by policy-makers and more important because it hits individuals and the public harder than inflation does, whether we look at the rational or irrational reasons. Unemployment can have greater consequences than inflation and also decrease AD relatively more. In the US the government also has to pay jobless benefits to those out of work. The fact it is an election year does matter to an extent because voters a looking for a leader who is able to come up with policy that aids what is most important to them, and many times this is unemployment.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    The US economy would self-correct, it would just take much longer without any different central bank or government policies. This is because wages would not continue to rise as unemployment rose because of the free market forces of supply and demand. With a large supply of workers firms to not have to increase wages to compete for workers, eventually they will have to lower them, this will cut costs and firms will be able to employ more labor.

    -jyoung

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  202. jyoungon 06 May 2013 at 11:35 pm

    #nwarner

    I agree with your view that the US economy is likely to correct. In this scenario it is not as much a matter of if, as when. Naturally it would take many different factors for an economy to come out of a recession or downward term, and if government policy is in place that negatively effects the economy it needs to be removed or replaced. Depending on the policy in place it can be harder for an economy to self correct with the government limiting it.

    -jyoung

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  203. tleeon 07 May 2013 at 4:50 am

    Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lower interest rates can encourage more firms to borrow more money. The money can be used to improve technology, hire more workers, and ultimately produce more. Also consumers will also borrow more money to spend which means that the firms will have to meet the higher demand so they will have to produce more.

    Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Increasing employment is a higher priority for policy makers because unemployment affects the individuals. The government doesn’t want unemployment rates to be high because this will negatively affect the AD of the economy. It does matter that its an election year because people want to make more money. So they will want to elect someone who will give them more job opportunity and compared to dealing with the inflation rate, increasing employment will appeal to the consumers more.

    “Workers’ wage gains – characterized as ‘modest’ – aren’t raising
    inflation worries. Wary employers have cut jobs every month so far this
    year and aren’t inclined to be overly generous in their compensation to
    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    It will take a long time until people can see any improvements in this ridiculously bad economy. However, because there are less income made, people will have to consume and spend less. This means that the prices of goods will have to decrease in order to meet the small demand. Once demand becomes stabilized, the firms don’t need to worry about supplying more because there is such a large amount of unemployed people looking for work that the wages will never rise. As long as there are a good percentage of people that are willing to work for minimum wages, the wages will never increase.

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  204. tleeon 07 May 2013 at 4:53 am

    To #jyoung

    I liked how you mentioned that the wages will not increase as unemployment rises. Your answers were very clear. Very good analysis. I also agree with when you said that people are looking for a leader that will basically provide them with jobs, so they will vote for a leader who will lower unemployment.

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  205. aleeon 07 May 2013 at 6:47 am

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    Lowering interest rates will result in positive supply-side effects for the economy because firms will be able to invest in more sophisticated technology or improve their current machinery to increase their output.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    Increasing employment may be a higher priority to policy-makers because if employment increases, more consumers will receive a higher income. If there is an overall higher income to consumers, consumption will increase. Bringing down the inflation rate is not very significant if a person has no income to begin with. It might matter more if it is an election year since policy-makers will try to please the public so that they can be reelected.

    3. If wages continue to rise even as unemployment rises, is it likely that the US economy will every “self-correct” from in times of an economic slowdown?
    No, it is not likely that the US economy will self-correct itself. If unemployment continues to increase, more people will have a lower standard of living. They will not be able to consume goods and services, and this will stunt the economy.

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  206. aleeon 07 May 2013 at 6:52 am

    Hello #tlee!
    I completely agree with what you said about people wanting to elect the policy-makers that give them more job opportunities. Good observation!

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  207. Yada Pruksachatkunon 07 May 2013 at 3:06 pm

    1) Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    As many have said before me, lowering interest rates equate to less value in borrowed money, and therefore, firms have more incentive with borrowing loans from banks. The newfound money can be used in Research and Development, which can in turn create technology breakthroughs in the production of a good or service. This will then create the aggregate supply curve to shift to the right, and inflation will decrease. However, even if there is no technological breakthrough, the increase in money will make it possible for firms to hire more labor (factor of production) and decrease unemployment.

    2) Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Unemployment is a worse evil than moderate inflation (as the US’ inflation rate is still lower than the double digits and is not yet considered hyperinflation) because it leaves a downward spiral where aggregate demand goes down, and unemployment increases. The government would need to increase their budget for unemployment benefits. Also unemployment leads to an increase in crime rates and depression, and the economy is not operating at full capacity. I do think that the factor of election year matters, as less unemployment will mean a less depressed population. Also, because candidates are trying to appeal to as many different demographics as possible, it is crucial that unemployment goes down (to signify the “every man should have the right to work”) and “equal rights” air that surround every election.

    3) “Workers’ wage gains – characterized as ‘modest’ – aren’t raising
    inflation worries. Wary employers have cut jobs every month so far this
    year and aren’t inclined to be overly generous in their compensation to
    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    I think it is likely that the US economy will self correct. Times like these are called “Stagflation,” or when a supply shock sends inflation rocketing, but there is not enough aggregate demand, and consumers and firms are not given an increase in real value of their money to compensate for the inflation. Therefore, firms are forced to lay off employees, and unemployment shoots up as well. Every time the US has been in a period of stagflation, during the 1970s, and during the 2000s, the US has recovered. Why can’t they do so again? The government will most likely have to enforce market-based supply side policies such as getting rid of minimum wage and trade union power in order to increase the demand for labor.

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  208. rparsonon 07 May 2013 at 4:24 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    Lowering interest rates might lead to greater investment in factors of production and R&D on the part of firms, which will improve the supply side.
    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    Because inflation is more of an insidious threat which is not really visible until hyperinflation begins to set in, voters are not likely to be concerned by it. However, unemployment is a very immediate and visible problem for most voters, and thus a solution to this is more appealing to politicians seeking reelection.
    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    If wages and unemployment both rise, this may be indicative of unemployment taking place among those who are less qualified for the job opening which exist, with the few qualified people being in high demand for companies. In the long term, education will increase the number of people qualified to do modern jobs and those who are unqualified will leave the workforce, decreasing unemployment. Also, those who do have higher wages are more likely to spend, helping the economy to recover. Absent incorrect intervention by government, an economy will self-correct.

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  209. rparsonon 07 May 2013 at 4:26 pm

    @jyoung,
    I agree with your answers.

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  210. Mkhosoon 07 May 2013 at 6:34 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    Lower interest rates decreases the cost of borrowing for firms and thereby encourages greater borrowing by firms. This borrowed money is then used by firms to conduct capital investments to maintain or expand a firm’s capital base, allowing the firm to expand in size and increase its production.
    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    Politics is a people game. It therefore follows that you win in politics by winning people. People are easily won over in election years by populist short term bonanzas and short-term economic boosts. One of the most visible of these ‘short-term boosts’ is reducing unemployment. It is easily and clearly seen, and very variable. Why is it that many government ministries usually add employees in the run up to elections? Why is it that governments prefer huge unsustainable stimulus packages in the short-term, which only delay the inevitable and painful economic rebalancing? Why is it that most governments are brought down through revolutions incited by the unemployed? Think Egypt, Tunisia, indeed, think the entire Arab spring.
    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    The economic situation is a clear example of ‘stagflation,’ a phenomenon in which unemployment and inflation are both simultaneously high. It is highly unlikely that the US will ‘self-correct’ in the current economic climate, as the serious fiscal imbalances in the economy are so deeply ingrained within the system that it will require a radical economic rebalancing to correct the system. This radical rebalancing can only be led by policymakers, it cannot be ‘automatic,’ the economy cannot simply ‘self-correct’ such tremendous imbalances. These imbalances include a ridiculous and unsustainable debt burden, highly concentrated wealth, economic inequality induced by geography, a weak education system and so on.

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  211. Mkhosoon 07 May 2013 at 6:45 pm

    @rparson

    You state that rising unemployment and rising wages is synonymous with greater concentration of skills among a falling percentage of the population. However, doesn’t something similar already occur? Often, technology firms will poach ‘high-flyers’ from other firms to work in their companies for huge salaries and bonuses. Is it not already common for ‘high-flyers’ with a certain ‘elite’ skill set to be paid at a wholly different level from the common man? Think sports, finance and so on.

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  212. alessiaayoubon 07 May 2013 at 7:02 pm

    1) Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lower interest rates, as mentioned, increase business investment and consumer expenditure or consumption since it’s now cheaper to borrow money from the bank. Increased levels of investment in the factors of production (labour, capital, raw materials, and even enterprise) contribute to an increase in productivity and thus an increase in overall output, meaning that the aggregate supply curve of an economy shifts to the right. This is certainly regarded as a positive supply-side effect. Given that lower interest rates also increase consumer expenditure, producers will be more inclined to produce more (further increase their output/supply) in response to an increase in demand in order to maximize their profits and utility. This is another positive supply-side effect triggered by lower interest rates, a demand-side policy.

    2) Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Policy makers should be more concerned about reducing inflation, rather than unemployment for several reasons.First of all, inflation affects the ensemble of the economy, and therefore has more significant impacts on a nation’s economy.
    During inflation, especially for individuals in a society whose wages or savings are fixed and not adjusted to inflation, purchasing power will decrease since real wages are reduced. The value of savings is also reduced. The overall loss of purchasing power reduces living standards, and generally creates unrest amongst the labour force who will opt to receive wages and salaries adapted to inflation. This will increase the costs of production, shifting the aggregate supply curve to the left, thus increasing prices, and causing further inflation and unemployment. The depreciated value of savings will discourage investment, and lower purchasing power will also do the same. Increased interest rates in attempts to reduce inflation and in order for banks to maintain their profits in real rates further decreases investment, and thus shifts the aggregate supply curve to the left, raising average price levels further. An inflationary spiral occurs. Unless inflation is reduced, the economy in question would only experience progressively slower growth.
    National exports will become less competitive internationally at higher prices, and demand for imports, cheaper (from countries with lower inflation rates) will increase, therefore increasing the leakages in the circular flow of income in the economy, and decreasing national output/income. This may lead to unemployment, not only in export industries as is China’s case, but in other industries as well. By establishing policies which fight inflation, economic policy makers are also likely to indirectly reduce unemployment.
    Unemployment comparatively does not trigger costs which are as devastating economically as does inflation. The costs of unemployment for example are lower living standards of the unemployed, higher crime rates, loss of tax revenue for the government, and increased government spending in the form of unemployment benefits. Note that all of this deals only with a minority of the population in an economy.
    In conclusion, the greater costs of inflation suggest that it should be of greater concern to economic policy makers than unemployment, although a balance between both is amongst the desired macroeconomic objectives.
    Moreover, I do not believe that this prioritization should change during an election year bearing in mind that it’s in the candidate’s greatest interest to opt for more stable rates of inflation in their economies in order to gain more political support.

    3) If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    Unemployment and inflation, the two evils of any economy, when occur simultaneously along with a lack of growth in consumer demand and business activity, are described as stagflation. This is certainly an unpleasant state for any economy to be in since policy-makers are faced by the trade-off between unemployment and inflation. Aggravating the confusion in this decision is the fact that it’s very difficult to determine which type of inflation and/or unemployment is in question, thus making the choice of policies to implement tricky. Is it possible for an economy to self-correct from this situation? Following the neo-classical LRAS approach, self correction is possible in the long run as the economy will always return to the full employment level of output. However this only happens in the long run, a situation which only comes to be after much suffering from both inflation and unemployment. Moreover the time lag after which this full employment state is achieved varies with the rates of inflation and unemployment. Following the Keynesian model, government intervention would certainly be necessary in order to limit the consequences of both inflation and unemployment on the economy and society in question to the minimum, and also to reduce their duration. This can be done through the administration of both demand and supply side policies. For example, the government may run a budget deficit to increase its spending in efforts to reduce unemployment, also done through the implementation of supply-side policies aiming to increase a nation’s potential level of output. Interest rates may be raised (a monetary demand-side policy) which is the best way to counter inflation. A certain rate of inflation may also be set as a goal by the central bank in order to ensure price stability.

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  213. alessiaayoubon 07 May 2013 at 7:07 pm

    # Mkhoso
    Very good answer but I think you should elaborate a little on question 1! :)

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  214. Yada Pruksachatkunon 07 May 2013 at 9:20 pm

    Comment to #tlee
    I like your response to the first question; I completely overlooked the impact of cutting interest rates for consumers.
    However, for your response to the second question, could you explain a bit more about the “individual” effects of unemployment, and why those effects are more severe than those of inflation. Inflation also has many individual consequences, including a decrease in real value of money.

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  215. rkangon 08 May 2013 at 3:18 am

    1.Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    - Low interest rates will ultimately lead to a increase in investment and consumption because low interest rates promote borrowing money. Most of the time firms and smaller consumers borrow money to spend it on a good or service. But if the demand for certain goods and services increase, the supply will also have to increase. Ceteris Paribus. Firms would try to increase their supply so that they can sell more products to the consumers that are willing to pay.
    2.Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    - Many times candidates try to make it seem like they can fufill all of their promises. Most of what they say is to gain popularity from the populous so that they can win the election. There may be some things that the candidate sincerely believes but a large part is to get the people to vote. Hypothetically, lets say the unemployment rate of country A is 10%. If a candidate appeals to the 10% of the people that are unemployed, then he will have a 10% advantage over the other candidates. I also think that unemployment can lead to higher rates of inflation. If less people are working, then the supply of goods and services will decrease. This means that firms are looking to sell their limited supply of goods for a higher price.
    3.“Workers’ wage gains – characterized as ‘modest’ – aren’t raising
    inflation worries. Wary employers have cut jobs every month so far this
    year and aren’t inclined to be overly generous in their compensation to
    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    - It is possible that unemployment rates can subside over time. As wages increase, unemployed people would have a motivation to seek a job to earn money. This is much like the long term equilibrium showed in the Neo-Classical long run equilibrium chart. There will be a sudden decrease in unemployment as the wages hit a certain price that is high enough to attract people into the work force.

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  216. rkangon 08 May 2013 at 3:30 am

    #mkhoso
    It is very interesting to see how election candidates use the problems of the economy to boost their appeal to the people. They somehow manage to get the problem of unemployment and use that problem to create more of a “fan base”. Personally I feel that people should be wary of all the things that the candidates say. They shoud realize that some of the things they could be promising is only for the sake of getting more voters. So in times of an election, people seem to be the most optimistic about the problems of the economy.

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  217. dtumanavarroon 09 May 2013 at 3:05 am

    Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    The low interest rates will increase firm investments and borrowing money which will allow them to maintain there supply with increasing aggregate demand. Lowering interest rates will also convince firms to start producing or working more within the country instead of where it is usually cheaper (china). The increase reliability of firms in their own country will open up new job opportunities etc it their own country. (Investing in your own country). The creating of new jobs within the country will employ more people.

    Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Their are many reasons that policy makers are more concerned in the primary than the latter. The first and weaker argument for this is that increasing employment will more likely bring down inflation than bringing down inflation increases employment in the short run. Also, supply-side policies tend to be more effective when it comes to cost-push inflation. But most importantly, to gain popularity. People are more likely to see a rise in employment than lowering in inflation and setting up fiscal policies never made a political party popular.

    “Workers’ wage gains – characterized as ‘modest’ – aren’t raising
    inflation worries. Wary employers have cut jobs every month so far this
    year and aren’t inclined to be overly generous in their compensation to
    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    Yes, I believe that every economy will eventually self correct itself. It would not be an easy time frame, and it could be very long, but every economy has eventually fixed itself or changed into a new market.

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  218. ykim3on 10 May 2013 at 1:33 am

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Lowering interest rates will help businesses to borrow money with cheap prices. The companies would be able to invest the money and develop or produce their products. This would improve producing ability and increase aggregate demand.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Unemployment has huge impacts on people. People can sese that they are going to lose or gain their jobs. Employment rate is a good thing to raise the popularity.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising
    inflation worries. Wary employers have cut jobs every month so far this
    year and aren’t inclined to be overly generous in their compensation to
    workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    As wages increase, unemployed people can be motivated to find the jobs for their lives. There will be a decrease of unemployment rate when the wages of workers become higher enough to attract people to work.

    #rkang
    You made a same argument that the change of wages will effect the unemployment.

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  219. edubison 10 May 2013 at 3:42 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    The lower interest rates lead to higher investment and consumption, which then results in positive supply-side effects because firms will be able to purchase goods like new technology, equipment, or increase workforce.
    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    Increasing employment should bring more capital into the circular flow of income. More money circulating in the economy will provide policy-makers with a greater audience and if the campaigners focus on this then they are likely to get votes of the lower income groups and unemployed.
    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    The US will probably try to put policies in place to decrease unemployment and encourage firms to hire more people even if they lower wages. This, however, isn’t self-correcting, so if there becomes an increase in small, or odds-and-ends jobs, then the economy may self-correct, but I don’t believe the economy will “right itself” without help from policies in this economic slowdown.

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  220. edubison 10 May 2013 at 3:49 pm

    # dtumanavarro
    You think that every economy will self-correct itself, yet didn’t give solid evidence that this has happened or will happen. You say that “every economy has eventually fixed itself or changed into a new market,” but doesn’t the government usually intervene to make the general public satisfied enough not to rebel or protest? For an economy to correct itself, specifically the US economy in its “downward spiral”, the majority of the population will have to want change and e willing to change, no easy feat.

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  221. amcpikeon 10 May 2013 at 10:21 pm

    Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    As stated above it is evident that lowering interest rates is a demand side policy, as it would increase both investment and consumption. However if we look at what low interest rates translate into practically we can see that it would become cheaper for firms to take out loans increasing their stock of money. This surplus of funds could lead to greater investment in research and development, consequently increasing productive efficiency and impacting the production sector of the economy. This would likely shift the Aggregate Demand curve to the right and decrease inflation levels alongside unemployment levels.

    Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Increasing unemployment is to a certain extent more dangerous than inflation. This is because unemployment damages a nations morale to a greater extent than inflation does. However a low morale is not the only reason that policy-makers should be aware of rising unemployment levels, as they also generate a host of other issues viz. black markets. The fact that it is election year only serves to aggravate the morale issue. This is because candidates will likely be proposing methods for decreasing employment would have massive impacts on both the number of voters, and who they are voting for. Inflation levels -which are less evident and consequently affect the psyche less- could be tackled once the candidate was in office by implementing new fiscal and monetary policy.

    “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    Unemployment and inflation working in tandem often signal a period of what is colloquially known as “stagflation” when they are accompanied by a period of decreasing consumer demand. Unfortunately for policy-makers this forces a them to focus on one of the two, while leaving the other to grow more severe. In most cases unemployment is tackled first, forcing money to inflate and firms to suffer a decrease in the value of their stock price as their real value is often inflexible. I would have to agree with many of the others who suggested changes in supply side policy to decrease minimum wage to tackle the issue of unemployment. However increasing salaries would likely be inconsequential if inflation is increasing at the same time, leaving fiscal and monetary policy to be implemented at later point to tackle the issue. So while some government intervention may be required, it is possible that the economy can self correct.

    #dtumanavarro

    While I agree with you that it is entirely possible for the U.S. Economy to self correct at some distant point in the future, I was wondering whether you had any insight into how this might happen. Do you believe that wages will drop on their own, or that government intervention is required to decrease union power and minimum wage?

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  222. ahmadson 10 May 2013 at 10:25 pm

    1) Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    When the interest rates are lowered, the firms will be encouraged to take loans to invest in their business that will increase the aggregate supply.

    2) Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    Because government don’t over view inflation as important when they are in sessions. They need support from the people and people will only support them if the government creates jobs for the people.

    3) “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    It is not automatically for this to balance itself in the short run however it is possible in the long run. This situation is called stagflation when the country is facing both higher rates of unemployment as well as higher rates of inflation. The government tacke this issue through fiscal policy, by promoting even and healthy growth and attempting to prevent inflation. If stagflation continues long enough, it will trigger an economic recession and an ultimate self-correction.

    Comment for #edubis: Hi Ellen, you have mentioned that governments need to intervene in order to tacke stagflation but I was wondering what were your exact suggestion?

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  223. hteohon 12 May 2013 at 6:23 am

    My Response:

    Week 30 Blogosphere

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. However, lower interest rates can also result in positive supply-side effects of the economy. This is because it enables suppliers and producers to loan money from banks at a lower interest rate. Borrowing from a bank is more appealing to a firm since paying back the money would not be that much of a problem anymore due to the low interest rates; it is less expensive to borrow. Firms can then invest in capital goods for new labor skills, new technology etc. Other than that, the loaned money can also be used to expand the firm size and to hire more workers, which then contributes to lower unemployment. Once there is a larger workforce, there will be increased output, which would shift the aggregate supply curve to the right.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Increasing employment is of a higher priority to policy-makers than bringing down the inflation rate. People feel more important as an individual when employment is placed as a higher priority than inflation rates. When inflation is high, the value of the currency earn by people is lesser than what they used to earn. Maintaining a low rate of inflation is one of the macroeconomic goals. Unemployment is a higher priority because it affects a larger group of people. Inflation affects those who are earning an income whereas increasing employment can help those people of earning income. Yes, the fact that it is an election year matters. This is because policy-makers want reelection for their respective government, so by putting employment as a higher priority, it makes the individuals in the society feel more significant and more important. Most votes will go to the party that shows the ability to solve problems, and social problems are more important and more familiar in the individual’s eyes since it has direct connections with their lives.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    This situation is known as stagflation, where there is both high inflation and high unemployment increases simultaneously. The increase in wages is a good sign for the economy because it means that national income is increasing, which means the quality of life for the employed would increase as well. However, this is a situation where the number of unemployed also ends up increasing, which means that there will be lesser and lesser people to reap such benefits. Also, with rising wages, companies will lay off workers in order to decrease their production cost. Unemployment then rises and rising inflation will make the situation even more difficult. Then, aggregate demand will decrease, since there is lesser aggregate supply as firms have lesser workers. It is not likely for the US economy to “self-correct” from in times of an economic slowdown so the Keynesian economics would be more appropriate in this case. The government should intervene to correct stagflation, either through expansionary or contractionary policies.

    My comment on # masayaechlf09 ‘s post:
    I like how for the 3rd question, you provided the possible solutions that the government can approach to reduce inflation and unemployment. I agree that these solutions: reduce the power of trade unions who resist in reduction of real wage and impose minimum wage; issue combination of reduced benefit and lower tax to induce the unemployed to take lower paid job; increase geographical and occupational mobility through retraining; or establishing an efficient system of information flow for the unemployed would be able to combat the situation.

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  224. Sasha_Son 12 May 2013 at 8:54 am

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    Low interest rates, ideally, would lead to a situation where borrowing becomes more appealing to a firm because the paying back would not be so financially straining. Lowering them further would result in positive supply-side effects for the economy because it amplifies the effect that is garnered from having low interest rates in the first place. Lowering them makes loans and borrowing even more popular, and henceforth allows the borrowing firms to invest in more capital goods (machinery), and even help the firm expand. This may help the firm acquire a larger workforce, thereby eliminating unemployment as a problem, and with the increased output garnered from a larger workforce and improved/increased capital goods, the aggregate supply could shift to the right, signifying strength.
    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    Unemployment is a matter of personal/individual importance as much as it is an economic matter. By having the employment being placed in a higher precedence than that of inflation rates, policy-makers are making it apparent that the people are more important than the state of the economy. What is somewhat curious about this relationship between inflation and unemployment is the fact that the two, to some extent, are interrelated. Inflation rates, if they are too high, reflect the fact that the value of the currency that is earned by people is less than they perhaps used to earn, effectively meaning that the people’s wages are cut, as they are, in essence, earning less than they used to earn. Maintaining a low rate of inflation is something that is very important to an economy, and, like unemployment (or rather, avoiding unemployment), it is a macroeconomic goal. Inflation, however, does not exactly result in unemployment, meaning that policy-makers can, in some ways, prioritize one over the other. Considering the second half of the question, election year is an incredibly weighted determinant in the appearance of such a prioritization. Policy-makers ideally want reelection for their respective government, and hence, by appealing to the people, not only as a collective, but also the ‘individuals’ that form the sum, they are making them feel much more important and significant. This gives them the feeling of having a voice, which is something very much appealing in a society. Thus, all things considered, unemployment is a higher priority because it more directly affects a larger group of people, as inflation merely affects the employed who are already earning an income, whereas fixing unemployment seeks to at least grant as many people as possible a form of income. With the incentive of reelection, prioritizing unemployment over inflation rates is quite a popular look for governments to have.
    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    Wages increasing is typically a good sign for the economy as it means that national income is increasing, and hence the quality of life for the employed is increasing. However, in a situation where the number of unemployed ends up increasing, there are less and less people who are able to reap such benefits. Wages increasing acts basically as a form of inflation, which means that both rising at the same time is the same thing as stagflation. In such an event, self-correction would effectively be an impossibility, which means that the government, against the apparent Capitalism that is evident in the United States, should intervene. This will make up for the inability to self-correct, and the government can act accordingly, manipulating factors so that there is restoration.

    To Daniel, I misinterpreted the third question, and now that I understand that wage increases are actually inflation, I understand how self-correction really is an impossibility with the United States if stagflation occurs. What measures/policies would you instigate for correction?

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  225. Malen Kon 12 May 2013 at 5:03 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    Lowering interest rates might result in positive supply-side effects for the economy because it will encourage investment and consumption. Lower interest rates means lower cost of borrowing. Firms will likely borrow from banks due to the lower interest rates and this will increase investments. With the new loan, firm can invest in capital to maintain the productivity of their existing capital or they can spend on capital to increase their output to respond to higher demand in the economy. This will lead to lower unemployment as firms hire more workers to meet the increasing demand. This will shift the aggregate supply curve to the right as labour is increased, leading to an increase in output.
    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    Increasing employment is of a higher priority to policy-makers than bringing down the inflation rate because inflation will only matters to those who have a disposable income that can be spent however, unemployment will matter to everyone. Also, lower unemployment also means more spending as people have an income to spend. Inflation would then have less of an impact on those who spend their income than those who are unemployed without an income. Both inflation and unemployment are macroeconomic objectives of the governments however, unemployment would be more important because it will directly relates to the welfare of the citizens whereas inflation is more connected to the economy itself. The fact that it is an election year does matter because if the government does not use appropriate and helpful policies then the citizens would not be happy and that might result in less support for the government. The government must prioritize the people before anything else since the people has a say in the election.
    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    A combination of high inflation and high levels of unemployment is known as stagflation. The increase in wages means that national income is increasing, which is good for the economy as it means that quality of life of the employed are better. However, when the unemployed are also increasing, this means that less people are able to take advantage of this increase in wages. With rising wages, firms would not hire as much workers due to high costs. Unemployment then continues to rise along with high levels of inflation. If wages continue to rise even as unemployment rises, it is unlikely that the US economy will ever “self-correct” from in times of an economic slowdown. The government would need to intervene through expansionary or contractionary policies, demand or supply side policies.

    Comment:
    @Sasha_S
    Hey Sasha! I definitely agree with your response towards these questions however, in question 2, you mentioned, “Inflation, however, does not exactly result in unemployment”, I somehow find that quite confusing because inflation occurs when there is a sustained increase in the price level, with inflation, costs would become more expensive, therefore firms would not hire more workers than they need to as it will increase their costs, which in turn causes unemployment. Perhaps you can explain further what exactly you mean by that statement. Well done ?

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  226. m2keoon 12 May 2013 at 6:49 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. However, lowering interest rates could also result in positive supply-side effects for the economy as suppliers and producers are able to get loans from the banks at low interest rates. Low interest rates also means low cost of borrowing, and thus attracting more firms to borrow as it is cheaper now. As already mentioned, this should lead to higher investment and consumption, which means higher quantity demanded and thus more output is needed. The money borrowed can be used to expand further and hire more labor, which reduces unemployment. Aggregate supply will be shifted to the right as unemployment rate decreases and more output is produced, and thus resulting in a positive supply-side effects for the economy.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    Increasing employment is of a higher priority to policy-makers than bringing down the inflation rate because even though both inflation and unemployment are variables of the macroeconomic objectives, but unemployment is considered of a higher importance than inflation and the reason lies on the fact that what matters more to the policy-makers are the people of the nation and not money. Having a low unemployment can reflects a lot about a country’s wellbeing as this would means higher standard of living and it also reflects the economic position of the country. Low inflation rate is a macroeconomic objective as well but it is not necessary the most important because again, inflation rate depends on the economic activities and its impact on the country is most likely to be lighter than unemployment problem. The fact that it is election year does matter because the citizens want a government who would prioritize them and care about their wellbeing so obviously the votes will go to the party that they have the most confidence in.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    It is very unlikely that the US economy will ever “self-correct” from in times of an economic slowdown because in this case, government intervention is very much needed. We can identify this situation as stagflation as both inflation and unemployment are rising. The fact that wages are rising is a good thing for the workers and for the economy as a whole because it would means an increase in national income, and thus a better standard of living and quality of life for the employed people. However, we also see that unemployment rate also seems to rise, which is a bad sign because it would mean that lesser people are enjoying the benefits of rising wages. When this happens, aggregate demand might fall because aggregate supply has also fallen since the firms need lesser labor and thus lesser output produced. Therefore the government would need to intervene in order to correct this stagflation either through demand or supply side policies and inflationary or deflationary policies.

    Comment:
    # Marcelo.echl.f09
    Hey there! Interesting response to question 3 as I did not really think of it that way but I think I got your point. The US could maybe ‘self-correct’ this situation because as you said when wage rises, labor costs become greater, and thus firms will most likely to fire workers to reduce their costs of production which further increases unemployment. It is not clear as of what really causes wage to rise but perhaps when we look at this in the long run, when more and more people are becoming unemployed, wage might fall as more people will be competing for jobs and thus accepting any amount of wage offered by firms. Or it could be as you said that those who enjoyed the rise in wage will spend more money and thus increasing aggregate demand, which makes firms wanting to produce more to further gain revenue and thus more labor will be needed.

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  227. kkozlovskison 14 May 2013 at 9:53 pm

    As the consumtion will rise so will the money spent on the goods, so the companies recieving this money will be able to make more actions, because they will have money in their pockets, so they will benefit in this way.
    Bringing the unemployment down is more important than bringing the inflation down, because having worthless money in your pocket is better than having worthless people in your country. For the country it is more impotant to make people happy, not to make the money happy.
    The economy of US will self-correct, but it will self-correct to the nearest point where it feels good, but not to the point in the history which has been the best for it. So it will correct itself but to a point nearest to the current situation, not to that which seems to be the best.
    # m2keo
    I agree with your answer to the question no 2, because I also think that it’s important to bring down the unemployment rather than the inflation, because the people for a country is more important that it’s money.

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  228. bdesslegnon 15 May 2013 at 9:29 pm

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    Low interest rates are demand-side policies as they facilitate an increase in consumption and an increase in investment. This is due to the fact that saving will decrease as consumers are discouraged by low-interest rates and that investment will increase as investors are encouraged to borrow and invest because of low interest rates, therefore it is clearly a demand-side policy. Lower interest rates could be supply-side policies too. That is because, as more and more investments are emerging total supply of goods and services by an economy will increase as well.
    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    Policy makers should always be concerned about employment. People are most likely to blame policy makers for them not having a job. Even though inflation may be high, unemployment is the more pressing issue. If prices increase, I might still manage to buy some items, however if I don’t any source of income then I am more frustrated. Therefore, people fear losing jobs more than they fear increase in price-levels. Policy makers are aware of that and in order to stay in office they have to address the most pressing issue. With this in mind, it is possible that the fact that it’s an election year might matter. Proximity is very important when people make decisions, I will be more likely to vote for an official if I have a job now at the moment, I might not dwell on the past. And since politicians keen in on that issue, they will make sure most people are employed in an election year, to prolong their stay in office.
    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    Stagflation is the phenomenon that explains this economic slow-down. It is no-longer a trade off as both inflation and unemployment are rising. The inflation caused may be a cost-push inflation where by as labor cost increases short-run aggregate supply might decrease. In this process, however, employers are cutting jobs which is also resulting in higher unemployment rates. Government intervention is needed to reduce unemployment rates specifically, Keynes had helped the economic recovery of the capitalist world after the 1929 depression by introducing the need for government intervention. To wait for the economy to self-correct isn’t advisable, government intervention is crucial.

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  229. bdesslegnon 15 May 2013 at 10:01 pm

    # m2keo
    Really thought out responses. Good job!

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  230. ABarrowon 15 May 2013 at 10:36 pm

    1. Lowering interest rates may result in positive supply-side effects for the economy by making investment more attractive to investors (because of loans at lower interest rates), increasing the aggregate demand curve and the employment rate in the process.

    2. Because the solutions to unemployment are easier to tackle in the short-run, compared to the longer time it would take to substantially reduce the inflation rate, increasing employment is of a higher priority to policy-makers than bringing down the inflation rate.

    The fact that is an election year matters because of the demagogue nature of politicians running for office that need public support to triumph.

    3. This all depends of which unemployment economic model you follow, be it classical, neo-classical or Keynesian…but in all honesty, the US is a supermarket…so if wages continue to rise even as unemployment rises, and this proves bad…the US (who makes all the rules in international politics) will find a way to accommodate and change for the American market’s benefit…

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  231. ABarrowon 15 May 2013 at 10:43 pm

    @bdesslegn

    Interesting take on what may happen to the US…Stagflation however, may be the least of America’s problems in the next couple of decades…because if the 3rd world has its way, America will loose the brunt of its international influence and supermarket power…

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  232. david.yooon 16 May 2013 at 5:47 am

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?

    -The statement of lower rates will lead to positive supply side effect is correct because it will definitely increase consumer consumption. This is because if the bank lower the interest rate, the customers will more likely to borrow money from the bank as they don’t have to as much of interest rate as before. This eventually increases the consumer spending. Furthermore, the firm also borrows money from the bank as the interest rates decrease, which eventually increases the investment. Increase in investment will turn into increase in productivity, revenue, and also they will hire more employees to keep up the investment, which lowers the unemployment. Finally, these entire positive shifts will give positive sign to one country’s economy.

    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?

    -Increasing employment is a higher priority to policy makers than brining down the inflation rate. This is because increase in employment will not only increase savings and spent on consumers since they are getting income but also it will increase investment for the firm which eventually increase the economy of the country as a whole. However, low inflation rate is also a good sign but it means that there is less of an impact to people who is employed and spend their income. Lastly, election does matter to the country’s economy as well as the citizens’ satisfaction. This is because only choosing a right policy will give benefit to the economy and increase citizen loyalty to the government.

    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?

    - High unemployment and high inflation is what we called “Stagflation”. Although the employees’ wage is increasing, there are still people who are unemployed. Rising wage gives benefit to individual employee but it will make the firm to lower the employment as they have to pay employees more than before. At the same time it increases unemployment even more. To conclude, it is unlikely that the US economy will ever self correct as both inflation and unemployment are increasing. To correct this, I think the government should intervene.

    #Malen K
    Good response! I definitely agree with you that low interest rate will increase consumption, investment, and unemployment. Also, I liked how you said about government intervention at the last question as there are both high inflation and unemployment.

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  233. avonwendorffon 21 May 2013 at 5:46 am

    1. Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
    Supply-side effects mean that they effect the output or quantity of goods produced. Lowering interest rates means that firms can loan money easier, and thus they can invest in better machinery and produce more. Also, consumers may chose to get loans when interest rates are low, and the demand and therefore the supply of goods will increase.
    2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
    I agree that unemployment is a bigger problem than inflation. People feel more personally connected when they are fired from their jobs than if the price of bread increases. If they lose their job, then consumers cannot buy anything (in theory). While inflation might be frustrating as you see your real income decreasing, you are still able to buy different foods.
    This being an election year is of course a factor. People without jobs will tend to vote against the party in power, as so called “retrospective voters.” They were unhappy during the past 4 years because they were out of work an unable to provide for their family, so they will vote out the current party. To combat this, the current party will work to decrease unemployment prior to an election.
    3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
    If wages rise as unemployment rises, it is unlikely that the US economy will ever “self correct.” The system consolidates the rich and the poor. There is a smaller group of people that earn the wages they need to survive comfortably. The government will need to step in, as they have done, to regulate the money supply or interest rates, for example, so that this gap decreases.

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  234. avonwendorffon 21 May 2013 at 5:52 am

    Hi # Mkhoso,

    You had very well thought out answers! I do, however, think that unemployment is more than a “short term boost” prior to an election. People are undoubtedly more responsive to employment data than inflation data, and this is used as a political tactic during elections, but I think the implications and effects last long after an election. Low unemployment is one of the macroeconomic goals of a nation.

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