Eco 360 Week Two Chapter Summary

Chapter 22

Chapter 22 explained economic growth, business cycles, unemployment and inflation. There are two frameworks that analyze macroeconomic issues; long-run growth framework and short-run business-cycle framework. Inflation is the result of creating credit values in society without the actual production of wealth. Monopolies of Land and Land Speculation creates artificial scarcity of land which results in skyrocketing land values and are the last values to come down during depression. It makes it difficult for labor and small capitalist to go into productive and profitable activities. All over monopolies such as franchises, rights and other exclusive privileges have the same effect. It creates higher values which people must all pay without getting more wealth in return. The business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real GDP and other macroeconomic variables (Author Unknown, 2008). A business cycle is identified as a sequence of four phases: Contraction (A slowdown in the pace of economic activity), Trough (The lower turning point of a business cycle, where a contraction turns into an expansion), Expansion (A speedup in the pace of economic activity) and Peak (The upper turning of a business cycle) (Author Unknown, 2008). High unemployment means that costs rise less rapidly than prices when unemployment is high, so that inflation slows down. On the other hand, low enough unemployment will cause costs to rise faster than prices, with the result that inflation speeds up. In between the two extremes is a rate of unemployment just high enough that costs and prices rise at the same level, so there is no tendency for inflation either to speed up or slow down.

Chapter 24

Chapter 24 discussed on growth, productivity, and the wealth of nations. Growth is an increase in the amount of goods and services an economy can produce when both labor and capital are fully employed (Colander, 2006). In microeconomics, a production function asserts that the maximum output of a technologically-determined production process is a mathematical function of input factors of production (Author Unknown, 2008). Alternatively, a production function can be defined as the specification of the minimum input requirements needed to produce designated quantities of output, given available technology (Author Unknown, 2008). The primary purpose of the production function is to address allocate efficiency in the use of factor inputs in production and the resulting distribution of income to those factors (Author Unknown, 2008). Under certain assumptions, the production function can be used to derive a marginal product for each factor, which implies an ideal division of the income generated from output into an income due to each input factor of production (Author Unknown, 2008).

Chapter 25

Chapter 25 discussed on aggregate demand, aggregate supply, and modern macroeconomics. When economic activity is below potential, governments can use fiscal or monetary policy to stimulate the economy to return it to potential. Demand side policies advocate deficit financed direct government expenditures or tax cuts to consumers that will increase spending. Demand-side economics focuses on consumption. The idea was that depressed consumption was the problem so government spending could be the solution. This required government spending more than it collected so over time, debt was accumulated which depresses investment and increases inflation. Supply side policy advocates tax cuts to people who save or invest to give him or her greater incentive to invest and produce by increasing his or her after tax rewards. Now supply-side economics is practiced through the switch to monetary policy rather than fiscal policy. This means prodding investment (the supply-side