Livingstone College Principles Of Economics Econ 231 Final E

Livingstone Collegeprinciples Of Economicsecon 231final Exam Fall 2021

Identify and explain the key concepts of fiscal and monetary policy, functions of money, measures of the money supply, components of the labor market, inflation, unemployment, and business cycles, and interpret related data and graphs to analyze economic conditions.

Paper For Above instruction

The principles of economics encompass a broad array of concepts fundamental to understanding the functioning of modern economies. This paper explores core themes such as fiscal and monetary policy, the functions of money, measures of the money supply, labor market dynamics, inflation, unemployment, and the business cycle, integrating theoretical knowledge with practical data analysis.

Introduction

Economics, at its core, examines how societies allocate scarce resources to meet their needs and desires. Governments influence economic activity through policies, while money acts as a medium facilitating trade and investment. Business cycles fluctuate due to internal and external shocks, impacting employment, inflation, and growth. Understanding these concepts is essential in analyzing economic stability and growth.

Fiscal and Monetary Policy

Fiscal policy involves government decisions to influence the economy through taxation and spending. When the government increases spending or decreases taxes, it aims to stimulate economic activity, especially during recessionary periods. Conversely, reducing spending or increasing taxes can cool an overheating economy. These actions are collectively known as expansionary or contractionary fiscal policies (Mankiw, 2020).

Monetary policy, orchestrated primarily by central banks, manipulates the money supply and interest rates. By purchasing or selling government bonds, central banks adjust liquidity levels, influencing inflation and economic growth (Friedman, 2021). The Federal Open Market Committee (FOMC) specifically targets these operations to achieve macroeconomic objectives.

Functions of Money

Money serves three primary functions: a medium of exchange, a unit of account, and a store of value (Samuelson & Nordhaus, 2010). As a medium of exchange, money facilitates transactions between buyers and sellers, reducing the inefficiencies of barter systems. Its function as a unit of account provides a standard for measuring and comparing the value of goods and services. As a store of value, money retains worth over time, enabling savings and deferred purchases.

Money's role is socially defined, meaning that society, through legal systems or recognized practices, delineates what qualifies as money. This social definition ensures stability and trust in the currency used, which is vital for economic stability (Laidler, 2012).

Measuring the Money Supply

The money supply is categorized into several measures: M0, M1, M2, and M3. M0 includes coins and notes in circulation; M1 adds checkable deposits; M2 encompasses M1 plus short-term time deposits and savings deposits; M3 further includes larger time deposits and other liquid assets. The provided data help calculate these measures and understand the liquidity available in the economy (Brunner & Meltzer, 2021).

Calculations of Money Supply

Given data: Currency in circulation ($70 million), Checkable deposits ($70 million), Savings deposits ($50 million), Money Market Mutual Funds (MMMF) held by individuals ($200 million), MMMF held by businesses ($220 million), Large-denominated time deposits ($180 million), Small-denominated time deposits ($80 million).

M1 includes coins, notes, and checkable deposits: M1 = $70 + $70 = $140 million.

M2 = M1 + savings deposits + MMMF (individuals) + MMMF (business): M2 = $140 + $50 + $200 + $220 = $610 million.

M3 = M2 + large-term deposits + small-term deposits: M3 = $610 + $180 + $80 = $870 million.

The Role of the Federal Reserve and Money Markets

The FOMC conducts monetary policy primarily through open market operations—buying and selling government bonds to influence liquidity and interest rates (Friedman, 2021). When the Fed buys bonds, it injects funds into the economy, promoting expansion; when it sells bonds, it reduces money supply, curbing inflation. The mechanisms are critical for stabilizing economic fluctuations.

Money as a Social Construct

The idea that money is socially defined emphasizes that its acceptance and value depend on collective trust and legal recognition. Governments declare what forms of money are legal tender, and society's acceptance sustains its value, allowing it to fulfill its functions reliably (Laidler, 2012).

Money's Functions in Daily Life

Money serves as a store of value, a unit of account, and a medium of exchange. For instance, depositing money in a savings account exemplifies its role as a store of value. Conversely, using money to pay for tuition exemplifies its function as a medium of exchange. When estimating expenses, consumers use money as a unit of account to compare costs and plan budgets effectively.

Marginal Propensity to Consume and Save

The marginal propensity to consume (MPC) and to save (MPS) measure how changes in disposable income influence consumption and savings. With an increase in disposable income from $1,200 to $1,700 and corresponding saving shift, the MPC can be calculated as the ratio of change in consumption to the change in disposable income (Mankiw, 2020). Similarly, the MPS is 1 minus MPC, indicating the proportion of additional income saved.

The Business Cycle and Economic Fluctuations

The business cycle comprises expansion, peak, contraction, and trough phases. An expansion signifies rising real GDP, while a peak indicates maximum output before decline. Contraction, or recession, involves declining GDP, and the trough marks the lowest point before recovery. These fluctuations are caused by shifts in aggregate demand and supply, interest rate changes, and external shocks (Blanchard et al., 2017).

Recessions trigger cyclical unemployment, while natural unemployment includes frictional and structural factors. Inflation, characterized by rising prices, impacts purchasing power and economic stability. It often accompanies expansion but can erode savings if uncontrolled.

Labor Market Metrics and Unemployment

The unemployment rate derives from the labor force, defined as employed and actively seeking employment. The data illustrate that only certain groups, such as those actively seeking work, are counted in the unemployment rate, excluding retirees and discouraged workers (Bureau of Labor Statistics, 2022).

Analyzing Price Indices and Inflation

A price index in years after the base year measures relative price levels. A CPI of 125 indicates that the current cost of a market basket is 25% higher than in the base year, which costs $400. Thus, the current price is $400 x 125/100 = $500.

Conclusion

Understanding economic principles, including fiscal and monetary policies, the functions and measurement of money, labor market dynamics, inflation, and business cycles, provides essential insights into economic stability and growth. Analyzing empirical data enables policymakers and economists to make informed decisions to foster sustainable development and financial stability.

References

• Blanchard, O., Amador, M., & Lombardy, M. (2017). Macroeconomics. Pearson.
• Bureau of Labor Statistics. (2022). The Employment Situation. U.S. Department of Labor.
• Friedman, M. (2021). Money Mischief: Episodes in Monetary History. Princeton University Press.
• Laidler, D. (2012). The Economics of Money, Banking, and Financial Markets. South-Western Cengage Learning.
• Mankiw, N. G. (2020). Principles of Economics (9th ed.). Cengage Learning.
• Samuelson, P. A., & Nordhaus, W. D. (2010). Economics (19th ed.). McGraw-Hill Education.