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The CPI market basket is determined by establishing specific information that is obtained when people are asked about everything they had purchased over a certain amount of time. For maybe a couple of years, information is gathered by a large number of people who record what they purchased and all of that information is used to find out what needs to go into the CPI.
The goods and services CPI covers is pretty much all the basic necessities we need. There is of course food and drinks along with clothing and shelter. Other things that are included are the following: vehicles, medicines and different types of entertainment. Taxes are even involved when someone makes a purchase and anything such as making investments is not associated with the CPI. CPI prices are collected by having people from the Bureau of Labor Statistics contact several businesses in the country to access the data on how much everything in the stores cost to see how the CPI transitions. During the course of one month, tons of products must meet a certain criteria for the prices to be documented and if they don’t meet the criteria, another product is chosen to be documented. All of this data goes to the Bureau of Labor Statistics, and they look over everything to be sure things seem correct.
To read or interpret an index, you first have to know that over a two year time frame, different items are chosen and their costs are watched over this time to see if the products become cheaper of more expensive. Everything always starts out as one hundred in the index and by the end of the two years if the prices have changed, they will either be less or more than what they first started out as. If the index is over one hundred by the end of two years, the price went up. If the index is less than one hundred, the price went down. The way the indexes keep up with these price fluctuations is by using both points and percentages, but the latter is the most helpful.
Published averages do not match an individual’s inflation experience all the time. Everyone spends money differently. One family could spend significantly less than another family and it wouldn’t be average. Some factors that may cause this to be different would be where you live, shop and item brands. It really comes down to us on how we spend our money. If we spend a bunch of our money on certain items, the prices of those items go up. Nothing is going to be the same all the time and that is normal.
CPI can be used for three things and they are the following: economic indicator, other economic series deflator and a way to adjust the value of the dollar. For the economic indicator, the government and businesses are informed about prices that have been altered and it helps them come up with future plans to help the economy. For the other economic series deflator, purchasing power is involved. This means that you can only buy so much with a dollar before it’s gone. The dollar inflates more as time goes on and the purchasing power goes down. You could purchase more items in the 1930’s with a dollar than you could today. A way that is used to adjust the value of a dollar is by having the CPI decide on how much money people can get whether they work or the government helps them out. Social Security is also involved along with taxes. There is a thing named a bracket creep which helps to keep taxes from going up.
The limitations of the CPI start out with the limitations of application. The CPI may not pertain to the entire population, but only to certain areas. The CPI also doesn’t compare the amount of money one business makes to another. The amount it costs for some things necessary for living do not count because there really is no control over them. The second limitation is the limitation in measurement which is split up into two different errors. The first error is the Sampling error. This error occurs because a sampling is only a small portion of the population. To be truly accurate, a survey of all people in the population and would need to be conducted. Non sampling errors are another problem. These may include incorrect pricing, surveys not being conducted in a similar time frame and product quality.
The CPI will be revised and updated in the future. People’s buying habits are always changing, and people are always moving to different areas. The Bureau of Labor Statistics made a couple of surveys to help them to quickly get the information they need. A census is also used to test out new areas and new people to research.
I’m sure I bought a candy bar multiple times in 1990’s. I also remember buying a T-shirt and probably a VHS tape. I also think I may have bought a ½ gallon of ice cream and books to read in elementary school.
Personally, the CPI rate of inflation for the purchases I made in the 90’s has increased by 149%. The cost of a VHS tape actually decreased because they are not used as much and most retailers are trying to get rid of stock. Other items I purchased at that time versus my purchases now have increased in price. Of course, I would not purchase the same type of book and would purchase a better quality t-shirt.
This section discusses the fundamentals of economics. I have seen thus far that economics is almost like a puzzle, it is not complete unless you have every counterpart. There are quite a few pieces to the economic puzzle. In order for everything to correspond there has to be the correct information that is input.
Keynes suggests that the government should boost their spending when the country is in a recession. The reason for doing so is that if people have more money to spend, then those people are going to go out and spend it and that’s going to help the economy. For the taxes, Keynes suggests that the government lowers them. By doing this, it would enable people to keep more of their money, so that they can purchase items more frequently. If the government decided to go along with this plan, it could do some good for both workers and businesses. When more people spend money on things that other people want, the demand for those items go up and more quantities of those items need to be made. The factories that make the products would have to produce more items while an abundant amount of workers would be given jobs to earn income.
If there were ever a time where inflation grew quickly, Keynes suggests that the government should change what they would do with a recession and instead do it completely different. Keynes says that Congress would need to cut back on how much money they spent, so people will end up having less money than what the government would give them to spend during a recession. Along with cutting back money, Keynes suggests that taxes should be raised in order to lower demand. No one would want to spend much money if prices go through the roof. People would be buying less and businesses and factories would probably start to go under because they wouldn’t have hardly any money to operate and inflation would go down. Depending on the situation, Keynes mainly focuses on how the government spends their money as it seems to be the key to how demand is determined. When dealing with taxes, people decide for themselves whether they want to spend a little extra or save their money as it wouldn’t affect them too much.
During a recession, the Federal Reserve should purchase bonds the way many people would which is through free trade. Banks should try to have more money reserved in them to lend people money when they need it and interest rates can be reduced. When interest rates go down, people feel more obligated to get a loan because they know that when the time comes to pay it back, they won’t be paying as much money as they would with higher interest rates. Also when people do this, demand is likely to go up. If interest rates go down, the banks must rely on the Fed if they ever need more money to loan out. Keynes additionally suggests that the reserve requirement is lowered also. Banks can give out more loans for people to spend and help the economy.
When there is a time that rapid inflation occurs, Keynes again changes what he would do during a recession and does everything different. He says that interest rates need to go up and have the bank’s accumulation of money go down. Basically, no one is going to want to get a loan, and people will start buying fewer items. If people buy less, bonds are something that most likely will not be bought.
If I had to make suggestion about what to do during a recession, I would try to encourage people to spend more of their money to stimulate the economy. I would make sure the banks had enough money to lend to people and have low interest rates. The more money that is spent, the more it helps support things such as the following: factories, businesses and workers. When many people borrow a lot of money from the banks, the interest quickly starts to add up, and the banks like that. I would also maybe lower taxes to further entice people into spending more. The government does seem to kind of know what to do during a crisis, so I agree to them to an extent. One of my main problems is the government giving money to people to spend during a recession to boost the economy. I think people should earn their money by working instead of putting America further into debt. Everything else sounds like a decent plan.
1. I believe I was successful in balancing the budget because I continued to decrease the deficit.
2. For every cut or addition that you make you have to be aware of how it is going to affect the budget as a whole. It’s not as easy as it may appear because one adjustment can throw the balance off.
3. Yes, because it gave you a general idea of the amount with which you would be working.
4. The first time I created a simulated budget, No, my perception did not match reality. Seeing the dollar amounts, what percentage, and how much went into each category helped create a more concrete understanding in the budget.
5. While creating the simulated budget, not all of my cuts were realistic. For example, I cut social security which would in reality be very unlikely considering this is money set aside for the security of our citizens in their old age. Before cutting certain areas it is important to be aware of how significantly it benefits the nation. This poses problems because in order to find a solution you need to monitor the problem over the course of a few years to make sure that one year was not a fluke.
6. Developing a national budget is one of the most important issues that economists must address. The government handles this multifaceted math problem by using a method called fiscal policy. Implemented by Congress, the government works to influence the nation’s spending, employment, and price levels through the use of government spending and taxes. The National Budget Simulator is based entirely on the concept of fiscal policy. In order to control money supply and interest rates, economists adjust government expenditures and taxation. This is precisely what the budget simulator demonstrates, allowing students or anyone else to gain a better understanding of how the nation’s financial decisions are made.
When dealing with matters that affect a mass population, every decision must be made with careful deliberation and in the best interests of the people as a whole. Government officials are professionals who come to what they deem the most effective conclusions possible. Despite this fact, there will still always be those that are unsatisfied with governmental decisions. This phenomenon is known as Public Choice Theory, which is directed towards the study of politics based on economic principles.
Government deficit is another aspect discussed in the text. A deficit is the remaining of government spending over government revenues during a given period of time. In other words the government has spent more than it had earned in revenue. When a nation spends more money than it has, it creates a National Debt. If the National Debt is increasing, then the nation has to borrow money to pay that dept, and there must be a deficit. This occurred a few times when I tried my hand at the National Budget Simulator. Cutting back the spending eventually showed that if you cut the budget to where it is not spending as much as you are earning, then you will decrease the deficit.
Although these estimates are based on information obtained from prior years, it is still an estimate which means if any crisis occurs I will not be held responsible. Also, the information given does not date to the year 2008 which would provide the most accurate analysis for the following year. That being said, I am confident in reporting that given the following information, the following events will occur.
The Consumer Price Index (CPI) is rising in the first quarter of 2006. I predict that in the fourth quarter of 2009, there will be an increase in the CPI due to inflation. Business Inventories and Sales have been steadily climbing since 2004. Since it has shown a steady growth in inventory and sales, it will continue to grow as long as the inventory and sales ratio balances out. Because the money supply seems to be increasing, it will lead to the growth of nominal GDP. The Stock Index shows that it is increasing steadily, which entails a strong increase of customer spending and business investment.
For every plus there is a minus; this principle relates to many areas, including economics. Housing and light-weight vehicles are just two that appear to be decreasing on the graphs. Housing starts will potentially decrease from 1.47 to 1.45 million which means that people are suffering financially and cannot afford to build or begin building houses. Light-weight vehicles are also decreasing because of the CPI increase. Meaning, if the consumer price index rises then people will focus on spending their money on needs and cut back on wants, such as light-weight vehicles. Also, while the Yield on 10-year Treasury Bond is down, it seems to be gradually climbing which will not have much effect for the next few years.
Durable goods, retail sales and Industrial Production are all positive but remaining constant. According to the advanced report on durable goods, unfilled orders are rising, shipments are down, new orders seem to be at a stand point. Another subcategory that is at a standpoint is retail sales. The important thing about retail sales is that it represents almost two-thirds of the Gross Domestic Product. With Industrial Production/Capacity Utilization barely afloat but still positive and representing about twenty percent of the GDP, it is safe to assume that the GDP will minutely fluctuate.
Given the information, I strongly believe that the GDP will remain almost constant. However, if any change does occur, the GDP will reflect a slight increase, showing that retail sales and industrial production/capacity utilization is at a constant and that makes up roughly 86% of the total GDP. That being said, the economy will not show much change. The change that will occur will be small increases in the GDP and the CPI.
In consideration of the concept of globalization and its long-term effects on the people directly affected by it, if one looks at China as an example, one can see that the bad often outweighs the good. Ever since China joined the WTO in 1998, it has slowly and steadily risen as a leading economic power in the global community. There is no doubt that the results of their joining the global community have benefited many.
In the documentary "To Have and to Have Not" which gives an inside look at Chinese economic conditions since China joined the WTO, some of these benefits are pointed out. The tariffs, for example, have been lowered since its joining. Also, the Chinese government has begun to loosen its tight grip on some of its citizens by allowing international satellites TV to broadcast in certain apartment complexes. Now citizens are able to watch programs such as CNN and HBO, which is something that was unheard of until recent years.
However, as one is given a glimpse into the lives of the common people of China, the rural villagers, once the very heart of Chinese industry, one can see that the bad certainly outweighs the good in the case for globalization. In this documentary, Dwanzhi She, a Chinese foreign trade consultant first gives viewers a look at his life in the city, then takes viewers on a trip back to his childhood home, where many still live in poverty. He admits that he feels guilty that he is living such a life of luxury in comparison to those who still live in his village as a child. China is the classic example of the old proverb "the rich get richer while the poor get poorer."
As business booms in Beijing, the poor villagers in rural areas continue to be completely unfunded by the government and left to fend for themselves. One girl,10 years-old, from Dwanzhi She's village shyly admits that she wants to be a writer and reads viewers a poem she has written about dreaming of growing up and achieving great things. Sadly, based upon statistics, out of a Chinese rural classroom full of children, only three will grow up to leave their poor villages and leave a life of poverty behind them. Since China's entry into the WTO, the number of food imports continues to rise, causing the lack of a need for Chinese farmers, because products are no longer needed that once were in high demand. This is expected to result in the loss of over 20 million farm jobs.
Many migrants, out of desperation, flee to cities to look for work. When nothing turns up, some are forced to use their last resort, prostitution, going as far as selling themselves to get by. While the poor get poorer, over the last ten years, the number of millionaires in China has risen considerably. Industries such as real estate developmental, have resulted in the success of once common people, pushing them into an upper level economic status. Couples like Zhang and Pan Shi Xin have achieved success through the housing industry. Ever since 2000, because the Chinese government-run banks started lending mortgages, this really jump-started the Chinese real estate industry. In essence, based upon this documentary, globalization certainly does not benefit everyone.
Globalization is the key to the future and the success of economies around the world. Through globalization, poverty can be changed by developing countries and integrating their economy with the world's. Globalization can benefit countries by getting poverty levels down and opening a country to the world. Countries may have something the world needs but without globalization other nations will never know and can never help that country use their resources as an advantage. With the rapid globalization accruing in the world, it took some countries by surprise. In the video globalization effects were shown at the poor level and the wealthy level. The example used in the video was China. China has one of the world’s fastest growing economies. With China's economy growing so fast, it seems the government is having a hard time dealing with the ramifications. In the video it gave a great look at the poverty level and how poor people are in China. However, it also gave testimonies by citizens that have benefited from the growth. I believe that globalization is great for China, yet the government has to quickly stop half of the country from going to a state of poverty. The presentation showed that people are willing to work, but sometimes they do not know their rights. China needs to create reforms that can help rescue the farmers and migrant workers. It is imperative that the government do away with not letting farmers into the cities. The country is a whole country not just a city. From my perspective China is too worried about still being communist and in control of their people. They have taken the right steps towards a free economy, yet they must help the poor before it brings down their economy. They also joined the WTO recently and began trading at a greater rate. This can be a huge help to their economy as well. By joining many jobs have been taken away from farmers growing rice for their own country. David Ricardo wrote great things about trade from one country to another. China can relate to his theory in that they joined WTO and began to trade, but is the trading they're doing good for their economy. With globalization taking away from the agricultural side of China's economy, the government must help in some way save the poor farmers. Yes, globalization calls for technology, but leaving the farmers behind will create more unemployment than employment. In sizing up China's economy, the article states that agriculture still employs fifty percent of the population which is equal to seven hundred million people. A key point stated in the macro notes was that in order to have a growing population the population must be and has to be educated. This point stuck out to me because while watching the video I saw how many kids are scarcely being educated by schools that are not even legal according to the Chinese government. Also in the notes another key to economic growth was property rights. Many citizens did not have rights to live in the city even though they live in the country itself. While China may be an economic power the government must fix these problems. China isn’t the only country who faces globalization, many countries in this world have begun to become more technology orientated. Countries now days have moved away from being independent and staying within their boundaries. Globalization is great in the long run and can benefit poor countries and less established countries. Globalization however does not work by itself. The government must step in and fix problems with its reforms in order for any country to achieve true success.
If we look at globalization from a microeconomist’s point of view, we see globalization as an extremely positive idea. It gives wealthy countries access to cheap labor, which we define as “comparative advantage” or “efficiency” and is overall a good thing for developed countries. However, this class is macroeconomics and sadly, the idea of globalization, when looked at holistically, is an increasingly bad idea.
Globalization is essentially the global spread of capitalism from developed countries to developing countries. Most Americans would see this as a good thing, because frankly we are fortunate enough to not have to see any of the negatives of globalization here. If we look at it overall, we do see several negatives that surely outweigh any positives. Globalization leads to the devaluing of labor. As we saw from the Wide Angle documentary, the rich grew richer while the poor stayed poor after introducing a free market economy. The poor workers there worked long hours for pennies on the dollar, and we can certainly say with much confidence that if they were working the same type of job in the United States, they would be making much more money than they do in China. But that’s the whole point of globalization—corporations are able to find countries with a “comparative advantage” in that their labor is cheap. This is a problem because it allows United States corporations (and other developed countries as well) to bypass labor regulations in their own countries by outsourcing their work to countries with looser labor laws where they can pay workers who work in deplorable conditions just cents per hour. This highly devalues the labor. As we also saw from the documentary, it is extremely hard, if not impossible, for those living in poverty in China to ever get above the poverty standard. They can work hard their whole lives and never make enough money to pay for even the most basic of their needs. Products can be created cheaper through this outsourcing of labor, but these production costs savings are never passed onto the consumer, they are pocketed by the corporations to increase their profit margins. Some countries don’t even have a choice in participating in the globalization of their economies, because while they are trying to become developed they sometimes find their selves needing to borrow capital from the International Monetary Fund, which forces them to open their borders to global trade. This is detrimental to the developing country because this gives the trading corporations access to their resources and the ability to exploit both these finite resources and their workers. Another notable example that comes to mind is Indonesia. Indonesia is rich in resources like oil, gold, and a large population of young workers. However, because of globalization, the vast majority of people there live in poverty. The wealthy businessmen from foreign countries come into Indonesia, profit from both the resources and the workers, and do not share any of the profit with the country or its workers.
Economists can and do look at global economic models and income charts and say that globalization is good for every country, but when they look at these models they’re only seeing money. They’re not seeing the conditions that the workers are living in, they’re not seeing the families who are exploited for their cheap labor and then unfairly compensated. They’re not looking at the ethical side of it at all, and I’d argue that anyone who did look at the ethics in this practice would never support it. It is essentially a modern form of imperialism, and we should not hold it to such a high standard.
Critical Thinking Essay
The purpose of this essay is to figure out if the Fed can function well on its own or if measures need to be taken to clean up some messes. Does the Fed function well with independence or does someone else need to take control of it? Let’s see what sounds best and what is actually a good choice.
To determine what would be the best choice to regulate the Fed, you first have to go through and carefully look over certain options and decide the best way to accomplish this task. The nation’s debt has grown increasingly high over a long period of time, and the Fed could do something to help reduce it, but sometimes it doesn’t seem like a great deal of work is getting done. There are many organizations out there that could probably at least attempt to fix the debt. They might be a little more successful at it than the Fed, and that’s what we are here to find out.
If you break it down to a basic definition, the Fed is the distributor that supplies money to all the banks in the United States. To get that money, the government has to make it. It would seem kind of hard in this day and age to save any money because it seems as if the government tends to spend it as soon as it’s made. It sounds like the Fed doesn’t have a choice and just has to go along with what others are doing and they have to do what they can with what they have.
After looking over many of the articles and giving it some thought, I honestly think that the Fed should have independence. Much of the material I’ve read has said that it could end up doing both good and maybe do some harm if independence was still given to the Fed. The President of the United States does play a role in making sure the Fed is regulated. However, I think if a President was in complete charge of the Fed, they probably wouldn’t be able to focus enough on it because they have other important duties that have to be done. The President chooses the Governors who will be a part of the Federal Reserve Board and the Senate has to approve of these people. These Governors can only keep this job for a little over ten years. They also are the ones who make the decision on who the Presidents of the Reserve Banks are after the Board of Directors of a bank chooses a worthy person they think is right for the job. All of these Presidents can only be in that position for about the same time as the Nation’s President, so the Governors end up having a longer term than the chosen Reserve Bank Presidents. All of these people would not be chosen if they were known to have a bad reputation or were known to be unethical, so everything should go smoothly. After everyone has been chosen, they can begin their duties. Certain requirements may have to be met before they begin, such as making sure they have enough money for them to function properly.
Research has also been conducted on how the Central Bank handles their independence and one of the things discussed is inflation. The Central Bank apparently made its independence known to an abundant number of places outside of the United States, and the main reason behind this move occurred was to control how the inflation would be handled in other countries. It turns out that when inflation decreases in different countries, it usually depends on whether the politics are powerful or not, but hopefully they could maintain a positive balance between the countries and the Central Bank.
If I had a second option, I think I would like to see the taxpayers take over the Fed and here is my logic. Many people across the nation work full time jobs, but there are also quite a few people who do not. Those who work or are not on welfare have to pay taxes. Those who pay taxes have a better understanding of how to manage money than those who do not pay taxes. Many people would be honored to have the opportunity to do something like this, and you cannot randomly give someone a job without them understanding the needed outcome. Giving power to the taxpayers could change the lives of an abundant number of people because they know that their money is being used the way they want. Decisions made by a fellow taxpayer would give all taxpaying citizens the feeling of having their voice heard.
While reading through some of the articles, I was perplexed by some of the material. Some articles had words that I had never heard of, and I still do not have a clue what they meant. I had to look up the definitions for some of them. Nothing made me question my beliefs, and my views did not change on the subject.
Everyone has their own take on how the Fed should be handled and that is how it is always going to be. I think the Fed should keep their independence, and another organization does not need to take over. Those who were chosen for the job got it because they could be trusted. The government is most likely the villain here and it makes the Fed look awful. The people in charge know what they are doing, so if something goes wrong with inflation or any other problem, they will handle it to the best of their ability.
Critical Thinking Essay
The Federal Reserve of the United States is the central bank and has a very unique public-private structure that operates independently within the government, but not independent of the government. A popular misconception held by many United States citizens is that the Federal Reserve, or Fed, is completely sovereign of federal authority—which is inaccurate. While it is true that the Fed is highly unregulated, it is not truly sovereign. To speak broadly, it appears to me that there are two types of people in this world: those who say that we should abolish the central bank, and those who understand what it is and what it does. As far as I have seen, there is no overlap between these two groups.
In general, there is no authority above the Fed that regulates what it does and does not do, but that does not necessarily mean that it is independent of the government. One could argue that it is attached to the government through both its transactions with the Treasury and its Board of Governors (which are appointed by the President and then approved by the Senate). The Board of Governors represents the public sector of the Fed, while the private sector is represented by the twelve reserve banks and the local citizens on their Boards of Directors. This structure allows both public and private interests to be served through one central entity. It also provides accountability while avoiding centralized government control of banks.
I believe that it is incredibly important that the Fed remain largely independent from government regulation because of the vital services that it provides the US economy, and in turn the global economy. US policy makers, legislators, or politicians from opposing parties have enormously different views regarding economics and fiscal policy. At times, I wonder how our federal government ever gets anything accomplished in terms of the economy and spending. The two major political parties in the United States have such drastically different views that they hardly ever agree on anything, especially when dealing with money. Republicans are more likely to adopt a Classical view on economics, while democrats will more often adopt a Keynesian view. This leads to many disagreements, and more often than not, roadblocks that bring any progress within the government to a halt. For this reason I believe that it is supremely important to keep the regulation of the Fed as it is. When changes to our economy need to occur to either correct inflation or recession, the Fed must act without regard to party stance. If its actions had to be regulated through Congress, it is likely that this process could take months, and by that time the economy would already be different and require a different set of actions.
To put this into perspective, I’ll give you an example. When politicians are subjected to political pressure, they often use excessively expansionary fiscal policy (this lowers unemployment in the short run). However, this also produces a higher rate of inflation and higher interest rates without actually lowering unemployment in the long run. If the Fed were subjected to the same political pressure, it would be bad for the economy because it would use its Easy Money policy even when it wasn’t necessary. The hope is, then, that the Fed can overcome the need to use its monetary policy to influence elections, as many, if not all, politicians do with their fiscal policy platforms. That would ensure that the Fed does what is good for the US economy in the long run, rather than what is best for politicians to be reelected in the short run.
Another important reason that I would advocate to keep the Fed independent of congressional or presidential regulation is the practice of debt monetization. This idea goes hand in hand with everything else I’ve argued. With the amount of debt that our federal government is in now, it is incredibly tempting for a politician to say we should print more money to pay for the interest collected by consumers when they purchase treasury bonds. Doing this would increase the rate of inflation, which would be very detrimental to the economy.
When everything is said and done, it is important to have an entity with the sole interest of keeping the US monetary system productive. It is easy to see that the Federal Reserve does have large amounts of power and responsibility in terms of its ability to correct any flaws within our economy. However, I do believe that the checks and balances designated within the government are adequate in the status quo. There is still some level of accountability within the Fed, and I don’t believe that increasing congressional or presidential oversight or regulation would be beneficial to the goal of the Fed or the government itself. The entire foundation of the Fed is that it was created to be independent of the federal government, and changing that in any way would not only interfere with its operations, but defeat the inherent purpose that it was created for. The system functions just fine as it is now, and if something isn’t broken, why try to fix it?
1 8 38 18 -24 26 14
2 6 43 18 -31 24 12
3 11 17 18 -13 29 4
When I had to decide which island I wanted to be in charge of, I decided to go with the green island because it had an abundant amount of labor with very little capitol. After choosing this island, I decided to pick the island with less labor and more capitol. This turned out to be the yellow island. It was kind of difficult to understand some of it, and I ended up making the people in the game upset with the decisions I made. My logic was that if an island had high capitol and low labor, the best thing to do would probably be to give them less cell phones and instead give them many pairs of jeans, but it would never work out no matter what I did. Some of my decisions sounded fantastic with the island leader, but the people of the island disagreed. I tried to be generous about giving the yellow island an abundant amount of jeans, but I somehow screwed it up. Because of the low cost of trade, both islands would benefit in it as an option. The island with more labor will pay more in wages which affects the capitol owner financially. It is still a good thing for the workers and the capital owners. Being able to trade with other islands is a great deal for all people because each area has an area where they do best. This means you get the best product at the best price when making a purchase. Without trade the islands would not have the products they need and could not afford them if they were available.
Chapter 8 Summary McConnell-Brue
1) Both consumption spending and savings rise when disposable income increases; both fall when disposable income decreases.
2) The average propensity to consume (APC) is the fraction of any specific level of disposable income that is spent on consumer goods; the average propensity to save (APS) is the fraction of disposable income that is saved. APC falls as APS rises when income increases.
3) Marginal propensity to consume (MPC) is the fraction of a change in disposable income that is consumed and it is the slope of the consumption schedule; the marginal propensity to save (MPS) is the fraction of a change in disposable income that is saved and it is the slope of the saving schedule.
4) Changes in consumer wealth, consumer expectations, interest rates, household debt, and taxes can shift the consumption and saving schedules.
1) The immediate determinants of investments are:
a. the expected rate of return
b. the real rate of interest
2) The economy's investment demand curve is found by cumulating investment projects, arraying them in descending order according to their expected rates of return, graphing the result, and applying the rule that investment should be undertaken up to the point at which the real interest rate equals the expected rate of return.
3) Shifts of the investment demand curve can occur as the result of changes in :
a. the gaining, maintenance and operating of capital goods
b. business taxes
d. stocks of capital goods on hand
4) Either changes in interest rates or shifts of the investment demand curve can change the level of investment.
1) Through the multiplier effect, an increase in investment spending ripples through the economy, ultimately creating a magnified increase in real GDP. The multiplier is the ultimate change in GDP divided by the initiating change in investment or some other component of spending.
2) The multiplier is equal to the reciprocal of the marginal propensity to save:
a. the greater the marginal propensity to save, the smaller the multiplier.
b. the greater the marginal propensity to consume, the greater the multiplier
3) Economists estimate that the actual multiplier effect in the United States economy is about 2, which is less than the multiplier in the text examples.