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i need you to write an essay related to this topic it is an economic homework.

please read a newspaper article related to one of the last 4 chapters in economic.Summarize the article and explain how the article relates to the concepts of the chapter. the chapters are attached down.

Monetary Policy

-1 How interest rates are set in the money market.

LO15-

How monetary policy affects macro outcomes.

LO15-

The constraints on monetary policy impact.

LO15-

The differences between Keynesian and monetarist monetary theories.

LEARNING OBJECTIVES

After learning about this chapter, you should know

CHAPTER

Monetary Policy

Control over the money supply is a critical policy tool for altering macroeconomic outcomes.

The quantity of money in circulation influences its value in the marketplace.

Interest rates and access to credit are basic determinants of spending behavior.

15-02

This chapter details how and when the policy tools of the Fed are used and the various outcomes that can be expected.

Monetary Policy II

In this chapter we explore the effectiveness of monetary policy. Specifically,

What’s the relationship between money supply, interest rates, and aggregate demand?

How can the Fed use its control of the money supply or interest rates to alter macro outcomes?

How effective is monetary policy, compared to fiscal policy?

15-03

The Money Market

Money is a commodity that is traded in a marketplace, the money market.

The money supply is controlled by the Fed and society has demand for money.

The market determines the “price” of money, the interest rate.

At high interest rates, money is expensive to acquire.

At low interest rates, money is cheap to acquire.

15-04

Here is a good place to use the product market analogy.

Remember to make the money supply a vertical line on the market model.

While any participant in an economy can increase or decrease the quantity of money that he or she holds individually, all participants taken together cannot change the quantity of money that they hold because the quantity of money is fixed. Currency and bank account balances can move from one participant to another, but only the Fed can change the total amount of money that everyone holds in aggregate.

The Money Market II

Money supply (M1): currency held by the public, plus balances in transactions accounts.

Money supply (M2): M1 plus balances in savings accounts and money market mutual funds.

Money demand: quantities of money the public wants to hold at alternative interest rates.

15-05

Review of definitions

The Money Market III

Money demand: If people hold cash as M1, they suffer an opportunity cost: the forgone interest they could have earned.

At low interest rates, the opportunity cost of holding money is low, so people will hold more of it, and vice versa.

15-0

The concept of opportunity cost is a real one.

The Demand for Money

Why would people want to hold money, that is, have a demand for money?

Transactions demand: Money held for the purpose of making everyday market purchases.

Precautionary demand: Money held for unexpected market transactions or for emergencies.

Speculative demand: Money held for speculative purposes, for later financial opportunities.

15-0

Not all people have all of these elements of money demand.

Because of that, it might be necessary to more fully explain those that the students have not encountered.

Most likely, those would be the precautionary demand (just-in-case money) and the speculative demand (I have to be ready to act when the opportunity presents itself). The transactions demand should present no problem.

Money Market Equilibrium

Money demand: the quantity of money people are willing and able to hold (demand) increases as interest rates fall, and vice versa.

Money supply: since the Fed controls the money supply, it is represented by a vertical line.
15-08

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As an exercise, you could show what happens when interest rates rise (surplus) and what happens when interest rates fall (shortage).
Also, show what happens when MS shifts left (interest rates rise) or shifts right (interest rates fall).
This sets up the next several slides.
8

Money Market Equilibrium II
The intersection of money demand and money supply (E1) establishes the equilibrium rate of interest.

15-09

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This slide establishes the connection between MS and interest rates.
9

Money Market Equilibrium III
If interest rates are higher than equilibrium, there is a money surplus.

People must hold more money as M1 than they want to.
They will move money out of M1 into M2 or other assets (such as bonds).
The interest rate will then fall to E1.
15-10

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Walk through the reactions of money holders when interest rates are above equilibrium.
10

Money Market Equilibrium IV
If interest rates are lower than equilibrium, there is a money shortage.
5
People must hold less money as M1 than they want to.
They will move money into M1 from M2 or other assets (such as bonds).
The interest rate will then rise to E1.
15-11

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Similarly for interest rates below equilibrium.
11

Changing Interest Rates
The Fed controls the money supply.
The Fed can use its policy tools to change the equilibrium rate of interest.
By increasing the money supply (causing a surplus), the Fed tends to lower the equilibrium rate of interest.
By decreasing the money supply (causing a shortage), the Fed tends to raise the equilibrium rate of interest.
15-12

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You might want to show this on a graph on the board.
12

Interest Rates and Spending
Lowering interest rates: a tactic of monetary stimulus, to increase aggregate demand (AD).
Reduce the cost of investment spending.
Reduce the cost of holding inventory.
The investment spending increase will kick off a positive multiplier effect. AD will shift right because of this.

15-13

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Here we connect lower interest rates through increased money available to increased spending and an AD shift to the right.
13

Interest Rates and Spending II
Raising interest rates: a tactic of monetary restraint, to decrease aggregate demand (AD).
Increase the cost of investment spending.
Increase the cost of holding inventory.
The investment spending decrease will kick off a negative multiplier effect. AD will shift left because of this.

15-14

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Here we connect higher interest rates through decreased money available to decreased investment spending and an AD shift to the left.
14

Summary
Goal 1: to stimulate the economy.
An increase in the money supply leads to,
Lower interest rates, which lead to,
An increase in aggregate demand.
Goal 2: to restrain the economy.
A decrease in the money supply leads to,
Higher interest rates, which lead to.
An decrease in aggregate demand.
15-15

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This summarizes the connections.
15

Policy Constraints:
On Monetary Stimulus
Short- vs. long-term rates.
The Fed has greater influence on short-term rates (that is, the Fed funds rate) than long-term rates (mortgages and installment loans).
Monetary stimulus will be most effective if long-term interest rate changes mirror short-term rate changes.
If not, the AD increase will be less than hoped for.
15-16

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How could this happen?
Easing up in the Fed sends strong signals to the private sector, especially the investment community.
If this community concludes that, due to the Fed’s easing, future expectations are rosier, then more long-term investment will occur.
And vice versa.
16

Policy Constraints:
On Monetary Stimulus II
Reluctant lenders.
Banks must be willing to increase lending activity.
Banks may pile up excess reserves instead of making loans (this happened 2008-2014).
They worry about their financial well-being.
They worry about not being paid back by weak borrowers.
They worry about how new bank regulations may affect profitability.
15-17

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In a previous chapter, the current atmosphere in banking was described as being reluctant to lend.
If this is the case, the Fed increasing the money supply with the intent of increasing reserves will not accomplish the added spending and the shift of AD right.
Say the Fed did this by buying bonds in the open market. Amazingly, the banks, instead of increasing loans, put their excess reserves in bonds.
17

Policy Constraints:
On Monetary Stimulus III
Lowering interest rates too far eliminates the opportunity cost of holding M1. The public simply hold the money instead of investing.
This is the liquidity trap: The portion of the money demand curve that is horizontal; people are willing to hold unlimited amounts of money at some low interest rate.
15-18

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How low can interest rates go? Zero? Negative?
Once interest rates get down to numbers like these, the opportunity cost of holding cash is also zero.
18

Policy Constraints:
On Monetary Stimulus IV
Low expectations:
In a recession, firms have little incentive to expand production capability (evident in 2008-2014).
There would be little expectation of future profit, or return on investment (ROI), from new investment.
Consumers may be reluctant to take on added debt when future income prospects are uncertain.
15-19

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For decades up to the onset of the Great Recession, Americans operated on credit. A major change began when the Great Recession occurred.
Instead of using stimulus funds to buy more, Americans used them to pay down existing debt, and their propensity to save increased.
This upset a lot of calculations made by policy makers, which were based on what they expected people to do, which they did not do.
19

Policy Constraints:
On Monetary Stimulus V
Time lags:
It takes time to develop and implement new investments in response to lower interest rates.
Consumers also may take time to decide to increase their borrowing.
It may take 6 to 12 months before market behavior responds to monetary policy.
15-20

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In both the government sector and the private sector, plans must be drawn up, analyzed, approved, and then implemented.
20

Policy Constraints:
On Monetary Restraint
High expectations:
In a growing economy consumers and businesses may believe that future income and revenue will be sufficient to cover higher interest rates.
Global Money:
Market participants can look outside of US money market for loanable funds in foreign subsidiaries, banks and bond markets.
15-21

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After a prolonged period of recession market participants may be slow to respond to “tight” money policy.
Instead of slowing down due to higher interest rates, growing expectations of future revenue and income could cause continued borrowing.
In a global economy market participants may find low interest alternatives for funding outside the US banking system.
21

The Monetarist Perspective
Keynesians say that changes in the money supply changes in interest rates, which shift AD.
Monetarists say that real output levels are not affected by monetary policy. Only the price level is affected by Fed policy … and then only by changes in the money supply.
So they say monetary policy is not effective for fighting recession, but is a powerful tool for managing inflation.
15-22

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Remember Keynesians are all about spending and moving AD.
Monetarists have seen over the last 50 years or so that increasing MS to improve the unemployment numbers has not been very effective, but decreasing MS to strangle inflation has been highly effective (witness the events of 1982-1984).
22

The Equation of Exchange
The equation of exchange is:

In this equation, total spending is price level (P) times quantity of output (Q). This spending is financed by the money supply (M) times the velocity of its circulation (V).
Velocity (V): the number of times per year, on average, that a dollar is used to purchase final goods and services.
MV = PQ
15-23

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This is not really an equation. A math purist will tell you it is an identity.
On the left is how much money is spent to buy the nominal GDP. On the right is the amount of money needed to buy the nominal GDP.
23

The Equation of Exchange II
PQ is the same as nominal GDP.
The quantity of money (M) in circulation and the velocity (V) with which it exchanges hands will always be equal to the value of nominal GDP.
Monetarist view: If M increases, P and/or Q must rise, or V must fall.
MV = PQ
15-24

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Velocity is an odd duck.
It might be useful to consider it as an indicator of how the public handles money. How the public handles money over a period of time can change (look at how the ubiquity of ATMs has altered the way we handle money). If we do not change the ways we handle money, then V should not vary much. When we do change the ways we handle money, then V will change. http://research.stlouisfed.org/fred2/series/M1V?cid=32242.

The Equation of Exchange III
Monetarists assume V is stable – that is, does not change.
V is a function of how people handle their money and the institutions they use to do so. Neither should change much in the short run.
Thus, total spending (PQ) must rise if money supply (M) grows and velocity (V) is stable, regardless of interest rates.
MV = PQ
15-25

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An alternative version of the formula is %change in M + %change in V = %change in P + %change in Q.
Someone in the math department will show you, via calculus, why this is so.
If V is stable, then the %change in V = 0.
So a 6% increase in M must show up as a collective 6% change in those two variables.
Possibilities: 6% increase in P and 0% change in Q; 0% change in P and a 6% increase in Q, or some combination adding up to 6.
25

Money Supply Focus
If spending increases when the money supply grows, then the Fed should focus on the money supply, not interest rates.
Fed policy should not be to manipulate interest rates.
Fed policy should focus on the size and growth of the money supply.
15-26

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Here is one position in the what to do with monetary policy debate.
26

“Natural” Unemployment
Monetarists also say that, in the short run:
Q is stable; a function of productive capacity, labor efficiency, and other “structural” forces.
This leads to a “natural” rate of unemployment that is fairly immune to short-run policy intervention.
Natural rate of unemployment: The long-term rate of unemployment determined by structural forces in labor and product markets.
MV = PQ
15-27

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In the short run, over three to six months, real GDP does not increase very much, so we could say that Q is stable.
A MS increase, however, would become effective more immediately. So an increase in M, with both V and Q constant, would cause an increase in P.
The consequence of this reasoning is that, at some level of real GDP, we reach a point where real GDP will not increase. Further injections of money will simply increase prices. The real GDP at which this happens is at the “natural” rate of unemployment, or more simply, full-employment GDP.
27

“Natural” Unemployment II
If both V and Q are stable, any increase in M in the long-run only increases P.
If prices rise, costs of production will rise also, so there is no profit incentive to increase Q.
Any increase in AD directly increases the price level.
MV = PQ
15-28

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Summary slide.
28

Monetarist Policy: Fighting Inflation
With an inflationary gap, interest rates are likely to be high. A decrease in the money supply will lower nominal interest rates, not raise them.
Nominal interest rate: the interest rate we actually see and pay.
Real interest rate: the nominal rate minus the anticipated inflation rate.
As the money supply shrinks, the price level falls and anticipated inflation decreases, so nominal interest rates fall, not rise.
15-29

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When we talked about liquidity earlier, we asked how low interest rates can go. Zero?
The interest rate people pay is the nominal rate. Lenders build the effects of inflation into that rate. Subtract the expected inflation and we get the real rate.
If the nominal rate is 1.5% and expected inflation is 3%, then the real rate is -1.5%, a negative rate.
In the example on the slide inflation is high, say 10%. Decreasing the money supply will be viewed as an inflation fighter, and expected inflation ultimately will decrease, which will lower the nominal rate.
29

Monetarist Policy: Fighting Inflation II
To close an inflationary GDP gap using monetary policy, reduce the money supply and shift AD left.
Monetarists advise steady and predictable changes in the money supply, to reduce uncertainty and thus stabilize both long-term interest rates and GDP growth.
15-30

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Both Keynesians and monetarists advocate a decrease in the money supply to fight inflation, but they expect it to work for different reasons.
The other big factor in the activities of the players in the economy is uncertainty. What is the Fed going to do next? What is the Congress going to do next?
In times of great uncertainty, the private sector holds off on making decisions, including investment decisions. This is why the monetarists advise a steady and predictable policy … to remove a huge element of uncertainty.
30

Monetarist Policy: Fighting Unemployment
The policy goal would be to increase aggregate demand.
Increased money supply leads to higher prices, immediately raising people’s inflationary expectations. Long-term interest rates might actually rise, defeating the purpose of monetary stimulus.
Monetarists conclude that expansionary monetary policy can’t lead us out of recession.
15-31

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Here are the contrasting views on how to fight high unemployment.
Monetarists believe in fixed money supply targets, or a “rule” for how much to change the money supply.
31

Application: The Economy Tomorrow
In the equation of exchange (MV = PQ), Keynesians’ fiscal policy relies on changes in V while monetarists assume V is stable and rely on changes in M.
The two tables following summarize their views on how fiscal and monetary policies work.
15-32

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This Economy Tomorrow segment summarizes the contrasting views of Keynesians and monetarists.
32

Application: The Economy Tomorrow: Fiscal Policy
15-33

Application: The Economy Tomorrow: Monetary Policy
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Application: The Economy Tomorrow (Cont.)
Which policy lever to pull?
Monetarists favor a fixed money supply.
Keynesians reject a fixed money supply.
Keynesians advocate targeting interest rates.
Keynesians advocate liberal use of fiscal policy.
Currently the Fed favors inflation targeting.
If inflation stays below a certain level, the Fed need not adjust its policy.
Once inflation rises above that level, the Fed will go into action to fight inflation.
15-35

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Note that Keynesians do not advocate monetary policy at all except to bolster their fiscal policy moves of shifting AD.
35

Revisiting the Learning Objectives
LO15-1 How interest rates are set in the money market.
People have a money demand, a need to hold money as M1.
The Fed determines the money supply, the amount of money people must hold.
The intersection of money demand and money supply determines the price of money, the interest rate.
15-36

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Here we begin a review of the chapter.
36

Revisiting the Learning Objectives II
LO15-2 How monetary policy affects macro outcomes.
By altering the money supply, the Fed can:
Influence short-term interest rates.
Influence inflationary expectations.
Determine the amount of purchasing power available.
Shifting aggregate demand left or right.
15-37

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Revisiting the Learning Objectives III
LO15-3 The constraints on monetary policy impact.
For monetary policy to be fully effective, interest rates must respond to changes in the money supply, and spending must respond to changes in the interest rate.
In a liquidity trap, this will not happen.
Investor and buyer expectations may override interest rate considerations in buying decisions.
15-38

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Revisiting the Learning Objectives IV
LO15-4 The differences between Keynesian and monetarist monetary theories.
Monetarists emphasize long-term linkages.
Using the equation of exchange (MV = PQ), and asserting V is stable, they say changes in M must influence spending (PQ).
Structural forces make Q stable in the long run, so changes in M directly affect P.
Keynesians believe changes in the money supply affect (short-term) interest rates and thus affect spending decisions, shift aggregate demand.
15-39

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Looking Ahead: Chapter 16
Supply-Side Policy: Short-Run Options
After learning about this chapter, you should know
Why the short-run AS curve slopes upward.
How an unemployment – inflation trade-off arises.
How shifts of the aggregate supply curve affect macro outcomes.
The tools of supply-side policy.

15-40

Supply-Side Policy

Short-Run Options

Why the short-run AS curve slopes upward.

How an unemployment–inflation trade-off arises.

How shifts of the aggregate supply curve affect macro outcomes.

The tools of supply-side policy.

-1

LO16-

LEARNING OBJECTIVES

After learning about this chapter, you should know

CHAPTER

Supply-Side Policy

Fiscal and monetary policies focus on the demand side of the macro economy. These policies shift the aggregate demand curve.

Policies that alter the willingness or ability to supply goods at various price levels will shift the aggregate supply curve. They are supply-side policies.

16-02

Fiscal and monetary policy are relatively short-run policies that work on AD.

Supply-side policies are much more long-run policies that work on AS.

They must be longer-run because they rely on changing the capability and the intention to produce, which takes time.

Supply-Side Policy II

In this chapter we focus on two issues:

how does the aggregate supply curve affect macro outcomes?

how can the aggregate supply curve be shifted?

16-03

Again, the macro outcomes of significance here are unemployment, inflation, and GDP growth.

Draw an AD-AS graph on the board. Shift AS left: unemployment rises, inflation rises, and GDP falls – a triple bad.

Shift AS right: unemployment falls, inflation falls, and GDP rises – a triple good.

Aggregate Supply

In the 1970s, the U.S. experienced stagflation: the simultaneous occurrence of substantial unemployment and inflation.

Shifting AD to “fix” stagflation is not possible.

Increase AD: unemployment falls and inflation rises.

Decrease AD: unemployment rises and inflation falls.

Supply-side policy arose to provide an answer to stagflation.

16-04

The term “stagflation” became a favorite new headline in the 1970s. It was coined by a British politician, Iain Macleod, in a speech to Parliament in 1965.

Keynesians were in total command of the economics world at the time.

Their favorite technique, shifting AD, couldn’t fix the problem. So they were out of arrows in their quiver.

In New York a small group of economists, newspaper people, and politicians met several times and came up with what came to be called supply-side policy as an antidote to stagflation.

Shape of the AS Curve

The Keynesian version:

AS is horizontal until Q*, is reached.

An AD shift to the right in recession increases Q but does not increase P.

Inflation becomes a problem only after AD shifts past Q*, the production capacity and AS becomes vertical.

16-05

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Remember, Keynesians never considered that moving AS was of any relevance or consequence.
They focused solely on AD. So their opinion of AS was molded by how it affected the AD shift.
5

Shape of the AS Curve II
The Monetarist version:
Changes in the money supply affect prices but not output.
An AD shift to the right increases inflation.
AS is a long-run concept and is vertical.
16-06

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Similarly, monetarists are focused on the shift of AD. Their concept of AS is long-run at the “full-employment” level of GDP.
6

Shape of the AS Curve III
The Hybrid version:
Most economists now see an AS curve with an upward slope that increases near full employment.
Inflation accelerates in that region of the curve as AD shifts right.
16-07

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This version of the AS curve includes the horizontal version of the Keynesians at levels of high unemployment and the vertical version of the monetarists at times of stressing the capacity of the country to produce (boom times). A transition zone lies in between as the AS crosses the full-employment GDP level.
7

Impact of the Hybrid AS Curve
Shifts of AD affect both prices and output.
Outcomes of fiscal and monetary policy depend on how close the economy is to full employment.
The closer to full employment we are, the greater the risk that fiscal or monetary stimulus will spill over into inflation.
16-08

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Most activity occurs in the transition zone.
8

Inflation-Unemployment
Trade-Off
The message of the upward-sloping AS curve is that demand-side policies alone can never succeed completely; they will always cause some unwanted inflation or unemployment.
This is the inflation-unemployment trade-off, which is expressed in the Phillips curve.
16-09

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The modern-day Phillips curve grew out of the work of A. W. Phillips, who studied the relationship of wages and prices in the U.K.
A very instructive documentation of the economic history of the last 50 years can be seen by following the Phillips curve.
The most significant revelation is just how few times in that half-century AD was the only curve that shifted. In other words, AS shifts have had a greater impact over the last half-century than AD shifts.
Phillips curve for the U.S.: http://www.j-bradford-delong.net/multimedia/USPCurve.html.
9

Inflation-Unemployment
Trade-Off II
As the economy moves from point A to B to C (left picture), the inflation-unemployment trade-off shifts from point a to b to c (right picture) on the Phillips curve.
16-10

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The AS curve is the mirror image of the Phillips curve.
10

The Inflationary Flashpoint
The upward-sloped AS curve has a point at which inflation rockets upward as the decrease in unemployment slows.
It is called the inflationary flashpoint: the output at which inflationary pressures intensify; the point on the AS curve where slope increases sharply.
16-11

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As the AS transitions from flat to vertical, there is a point where inflation accelerates.
11

Shifts of the AS Curve
Rightward shift of AS:
Good news! Reduces unemployment and inflation at the same time.
Also increases output.
Shifting AD cannot do this.
Leftward shift of AS:
Bad news! Both unemployment and inflation increase, and output decreases.
16-12

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This demonstrates what happens when AS shifts. Right? Good! Left? Bad!
12

Relation between AS and Phillips Curve
When AS shifts right, the Phillips curve shifts left.
This eases the inflation-unemployment trade-off.
Both inflation and unemployment fall.
When AS shifts left, the Phillips curve shifts right.
This makes the inflation-unemployment trade-off much more severe.
Both inflation and unemployment rise.
16-13

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This simply verbalizes the mirror image quality.
13

The Misery Index
Misery index: a simple sum of the inflation and unemployment rates.
If AS shifts right, both elements decrease and the misery index falls sharply.
If AS shifts left, both elements increase and the misery index rises sharply.
16-14

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Another big headline in the 1970s. This term was coined by Arthur Okun.
AS shifts left? Misery index rises.
AS shifts right? Misery index falls.
14

What Shifts the AS Curve?
Shifting AS right:
Policies that provide incentives for suppliers to increase production.
Tax incentives for saving, investment, and work.
Human capital investment.
Deregulation.
Trade liberalization.
Infrastructure development.
Generates desirable macro outcomes.
16-15

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Anything that increases the reward for working, investing, and saving.
Anything that improves productivity.
Anything that lowers costs of operation, including taxes and compliance with regulation.
15

What Shifts the AS Curve? II
Shifting AS left:
Policies that provide disincentives for suppliers to increase production.
Tax increases for saving, investment, and work.
Deteriorating human capital investment.
Excessive, costly regulation.
Trade restrictions.
Decaying infrastructure.
Negative external shocks, such as natural disasters and war.
Generates undesirable macro outcomes.
16-16

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Anything that decreases the reward for working, investing, and saving.
Anything that degrades productivity.
Anything that raises costs of operation, including taxes and compliance with regulation.
Plus external effects.
16

Tax Incentives
Keynesians will cut taxes to increase AD.
Supply-siders note that high tax rates destroy the incentive to work and produce, which ends up reducing output.
Lowering tax rates encourage people to earn more because more ends up in disposable income and less goes to the government.
16-17

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This contrasts the different ways of looking at tax law changes.

Tax Incentives II
Supply-siders emphasize a reduction in marginal tax rates for both workers and firms.
Marginal tax rate: the tax rate imposed on the latest earned (marginal) dollar of income.
High marginal tax rates provide a disincentive to:
increase their earnings.
start or expand a business.
increase investment spending.
16-18

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In the Reagan era, when the top tax rate was reduced from 70% to 35%, an entrepreneur who could do some extra work and earn an extra $100,000 would see his or her added take-home pay more than double from $30,000 to $65,000.
18

Marginal Tax Rates
16-19
Top marginal income tax rates in the US since 1914.

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Tax Incentives III
High marginal tax rates will shift AS to the left.
A reduction in marginal tax rates will shift AS to the right.
On the other hand, a tax rebate (one-time tax refund) adds to disposable income but does not affect the marginal tax rate, so AS does not shift.
16-20

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Keynesians, of course, would prefer the tax rebate. Its only effect would be to shift AD.
20

Savings Incentives
Keynesians treat saving as a deterrent to spending, a leakage.
Supply-siders emphasize the importance of saving for financing more investment and economic growth.
They favor tax incentives that encourage saving and greater tax incentives for investment.
16-21

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Savings provide the input for the credit market.
Encouraging saving would expand the availability of credit and lower interest rates with no Fed involvement.
Tax incentives for investment encourage more of it to occur.
Both will increase investment and shift AS, both short-run and long-run, to the right.
21

Investment Incentives
Supply-siders advocate tax incentives for investment.
Reduced taxes on capital gains and dividends.
Larger capital expensing of new investment.
The goal is to expand investment spending, which increases the capacity to produce. This will shift AS to the right.
16-22

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Summarizes the supply-siders point on investment incentives.
22

Human Capital Investment
Supply-siders encourage investments in human capital – the knowledge and skills possessed by the workforce – to provide the knowledge and skills needed to reduce structural unemployment.
This can be done by providing tax credits to employers who offer more worker training.
16-23

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The goal here is to improve productivity.
Productivity leads to lower per-unit costs.
Lower per-unit costs lead to expansion of production.
23

Other Human Capital Incentives
Expand and improve the educational system.
Reduce discriminatory barriers by using affirmative action programs.
Keep transfer payments from becoming excessive and providing a disincentive for recipients to take a job.
16-24

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All of these will aid in shifting AS to the right.
24

Deregulation
When government imposes regulations that directly affect employment and production decisions, it affects the AS curve.
Excessive regulation is costly to producers and will shift AS to the left.
Decreased regulation (or deregulation) reduces costs for producers and will shift AS to the right.
16-25

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One of the big uncertainties that slowed the economic recovery in 2010-2012 was the huge uncertainty among business about how much of an increase in regulatory costs they would face when all the new banking, health, and environmental regulations in the pipeline went into effect.
They envisioned rapidly rising regulatory costs, which would shift AS left and cause the triple bad.
25

(De)regulation
Regulations have good reasons for existing but shift AS to the left by increasing costs to producers. Examples:
minimum wage.
mandatory benefits.
occupational health and safety.
transportation costs.
food and drug standards.
environmental protection.
Supply-siders contend that regulatory costs are now too high.
16-26

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If high regulatory costs shift AS left and cause higher unemployment, higher inflation, and slow GDP growth, it might be time to do a benefit-cost analysis on some of the offending regulations.
26

Easing Trade Barriers
When production costs rise, AS shifts left.
Tariffs (taxes on imported goods) make input costs higher.
Immigration restrictions make it more difficult to overcome skill shortages in the labor market.
Supply-siders say that tariff reduction on inputs and improvement in the flow of immigrant workers cause production costs fall and AS will shift right.
16-27

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Protection occurs when tariffs and quotas are passed by Congress with the rationale of “protecting” American jobs. We will debunk that myth in the international chapters. What protectionism really does is raise costs of all production and destroy jobs in exporting industries.
27

Adverse Supply-Side Policies
The following policies shift AS to the left:
higher marginal tax rates for individuals and businesses.
increased taxes on saving and investment.
letting infrastructure deteriorate.
increased government regulation.
increased trade barriers.
When AS shifts left, output decreases, unemployment rises, and inflation increases.
16-28

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Supply-side policy is one-way: advocate practices that will shift AS right. Never advocate practices that will shift AS left.
28

Application: The Economy Tomorrow
Rebuilding America.
We must maintain, improve, expand, and in some cases replace our public infrastructure.
Delay in doing so imposes severe costs in the everyday activity of America.
In the economy tomorrow:
deteriorating or inadequate infrastructure will shift the AS curve to the left.
modernizing and updating infrastructure will shift the AS curve to the right.
16-29

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Some infrastructure improvements in the world have skipped a generation or two in technology. In Africa and Asia, communications jumped over the landline telephone directly to cell phone technology, for example.
29

Application: The Economy Tomorrow II
Infrastructure: The transportation, communications, education, judicial, and other institutional systems that facilitate market exchanges.
Improving these institutional structures makes commerce flow easier and therefore reduces costs.
Reducing costs will cause the AS curve to shift right.
16-30

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Nobody advocates the wanton and deliberate deterioration of infrastructure.
However, when funds are allocated for infrastructure, they seem to have to go through the “pork barrel” and go to projects that are more political than necessary.
30

Revisiting the Learning Objectives
LO16-1 Explain why the short-run AS curve slopes upward.
There is a maximum capacity to produce at any time in an economy. As output nears that capacity, output increases slow down but price increases accelerate.
The AS curve traces this phenomenon.
16-31

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Here begins the review of the chapter.
31

Revisiting the Learning Objectives II
LO16-2 Discuss how an unemployment-inflation trade-off arises.
Because the AS curve slopes upward, there is a trade-off between unemployment and inflation as illustrated by the Phillips curve.
The Phillips curve and the AS curve are mirror images.
The inflationary flashpoint is the rate of output where inflation accelerates and the trade-off becomes acute.
16-32

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Revisiting the Learning Objectives III
LO16-3 How shifts of the aggregate supply curve affect macro outcomes.
Supply-side policies attempt to shift AS to the right, yielding less inflation and less unemployment.
Marginal tax rates are a major concern of supply-side economists. They believe high tax rates discourage extra work, investment, and saving shifting the AS curve to the left.
16-33

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Revisiting the Learning Objectives IV
LO16- 4 Identify the tools of supply-side policy.
The goal of any supply-side policy should be to shift AS to the right.
A reduction in marginal tax rates will do this.
Also, a rightward shift of AS is the result of investments in human capital, reduction of regulatory costs, infrastructure development, and reduction of trade barriers.
16-34

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Looking Ahead: Chapter 17
Growth and Productivity: Long-Run Possibilities
After learning about this chapter, you should know:
The principal sources of economic growth.
The policy tools for accelerating growth.
The pros and cons of continued growth.
16-35

Theory versus Reality

-1 The tools of macro policy.

LO18-

How macro tools should work.

LO18-

The constraints on policy effectiveness.

LEARNING OBJECTIVES

After learning about this chapter, you should know

CHAPTER

Theory versus Reality

Theory is supposed to explain the business cycle and how to control it.

Many realities keep us from reaching our economic goals.

Conflicting advice comes from Keynesians, monetarists, and supply-siders.

Politics takes preference over economics in Congress and the presidency.

A massive, unresponsive bureaucracy exists.

18-02

This chapter summarizes macro policies and attempts to bring them into the real world.

Theory and Reality

In this chapter we look at the sources of these frustrations.

Specifically,

What is the ideal “package” of macro policies?

How well does our macro performance live up to the promises of that package?

What kinds of obstacles prevent us from doing better?

18-03

Available Policy Tools

Fiscal policy

Tax cuts and increases

Changes in government spending

Monetary policy

Open market operations

Changes in reserve requirements

Changes in discount rates

Supply-side policy

Tax incentives for saving and investment

Deregulation

Human capital investment

Infrastructure development

Free trade

Immigration

18-0

This is a summary slide collecting the various levers in each of the three policy tools.

Fiscal Policy

Automatic stabilizers: a basic countercyclical feature of the federal budget.

Discretionary fiscal policy: deliberate policy decisions made to expand (or shrink) the structural deficit and give the economy a shot of fiscal stimulus (or restraint).

18-0

Summarizes fiscal policy.

Monetary Policy

The Fed’s Board of Governors makes monetary policy.

The Federal Open Market Committee pulls the levers.

Keynesians believe that changing interest rates are the critical policy lever to shift aggregate demand.

Monetarists believe that expanding the money supply at a steady, predictable rate is the critical policy tool.

18-0

Summarizes monetary policy.

Supply-Side Policy

A long-run policy to provide incentives to work, save, and invest.

Marginal tax rates and government regulations must be reduced to get more output without inflation.

The supply-side policy levers require changes in laws and regulations, so Congress and the president must enact supply-side policy.

Fiscal and supply-side policies often get entwined.

18-0

Summarizes supply-side policy.

Idealized Uses: Recession

Goal: to close the recessionary GDP gap.

Keynesians: increase AD by tax cuts or spending increases. Also, decrease interest rates to spur investment.

Monetarists: fiscal policy doesn’t matter. The appropriate response is patience.

Supply-siders: cut tax rates and reduce regulation to improve production incentives and long-run development.

18-08

This looks at the policies from a problem point of view – here, a recession.

Idealized Uses: Inflation

Goal: to close the inflationary GDP gap.

Keynesians: decrease AD by raising taxes and cutting government spending.

Monetarists: reduce the money supply.

Supply-siders: expand productive capacity.

18-09

Here, for inflation.

Idealized Uses: Stagflation

Both inflation and unemployment are high, and economic growth is stagnant.

Fiscal restraint and tight money will reduce inflation but increase unemployment.

Fiscal stimulus and easy money will reduce unemployment but increase inflation.

If caused by adverse policy (high taxes, excessive regulation), supply-siders propose reversing those policies.

If caused by external forces (oil price spike, natural disaster), no policy can help much.

18-

Here, for stagflation.

Fine-Tuning

Fine-tuning: policy adjustments designed to counteract small changes in economic outcomes.

In 1978 Congress set goals of 4% unemployment, 3% inflation, and 4% economic growth.

The reality is that government has difficulty making fine-tuning adjustments to meet these conflicting goals.

18-

The term “fine-tuning” is a residual from early TV sets that had a channel selector surrounded by a dial that made the picture clearer. It fine-tuned the picture.

Keynesians championed fine-tuning to have policy makers continuously monitor the economy and “tweak” it when it seemed to move away from some ideal state.

Congress actually set these conflicting goals as the “ideal.”

The Economic Record

18-12

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Here you can show recessions, recoveries, stagflation, and the changes in the variables . Also, you can contrast the goal with reality.
12

Why Things Don’t Always Work
There are four obstacles to policy success:
goal conflicts
measurement problems
design problems
implementation problems
18-13

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Described on the next slides.
13

Goal Conflicts
Fiscal policy has a trade-off between unemployment and inflation.
The Fed wants fiscal stability, but the president and Congress may be unwilling to raise taxes or cut spending.
Some cutbacks may become politically impossible to enact.
Opportunity cost: conflict between the benefit and the cost of a policy option.
18-14

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You might remind your students that politics always trumps economics in any discussion.
14

Measurement Problems
Measuring the macro variables takes time, so the results are not available for a month or more.
Policymakers rely on economic forecasts made by “experts” using models that are tied to one theory or another.
Some data (e.g., Leading Economic Index) try to predict turns in the business cycle.
External shocks are not predictable.
18-15

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The final report of GDP for the second quarter of each year does not become public until three months later. The second quarter ends in June, and that final report comes out in September. Preliminary reports in July and August will be revised by the later report.
This is the reason why expert forecasts are relied upon.
15

Design Problems
Once we think we know what the problem is, we must design a “fix” for the problem.
Should we take
The Keynesian approach?
The monetarist approach?
The supply-sider approach?
How will the marketplace respond to our plan?
18-16

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We have looked at the various approaches. Each has its advocates. Which will be used depends on the number of people in power who advocate each approach as well as their ability to persuade the others.
16

Implementation Problems
Any “fix” must work through congressional deliberations and be approved by the president.
Once approved, will it be put into effect in a timely manner?
The time lag may be so great that a stimulus package may go into effect after a recession has ended.
Political pressure may preclude a correct “fix” from ever being passed.
18-17

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Time is lost just getting the data. Time goes by as Congress deliberates. Time will pass as the bureaucracy implements the policy. More time goes by as the implemented policy hits the street. More time passes to get the multiplier effect to work.
17

Time Lags
It is highly possible that the impact of the policy may not occur until after the problem has begun to “fix” itself.
18-18

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Application: The Economy Tomorrow
Hands on? Or Hands off?
Hands on: policy activists emphasize that there are greater risks in doing nothing when the economy is faltering.
They advocate active government intervention and assure the country that the proposed “fix” implies progress.
They believe there is enough knowledge to manipulate the economy through its troubles.
18-19

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Elected officials know they were sent to Washington to do something; doing nothing might not be an option.
19

Application: The Economy Tomorrow II
Hands on? Or Hands off?
Hands off: proponents argue that discretional fiscal policy or monetary policy can help, but the implementation problems are too great.
New classical economics: government should provide a stable environment and then get out of the way.
Rational expectations: people anticipate what the government will do and take actions to protect themselves, countering the government’s action.
18-20

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There is no prospect for this argument to be resolved in the near future.
20

Application: The Economy Tomorrow III
18-21

Revisiting the Learning Objectives
LO18-1 Know the tools of macro policy.
To end a recession, cut taxes, increase government spending, or expand the money supply.
To curb inflation, reverse each of those policy tools.
To overcome stagflation, combine fiscal and monetary levers with supply-side incentives.
18-22

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Here we begin the review of the chapter.
22

Revisiting the Learning Objectives II
LO18-2 Know how macro tools should work.
AD increases if we cut taxes, increase government spending, or expand the money supply.
AD decreases if we raise taxes, decrease government spending, or shrink the money supply.
AS increases if we reduce tax rates and decrease government regulation.
18-23

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Revisiting the Learning Objectives III
LO18-3 Know the constraints on policy effectiveness.
Implementing macro policy is difficult due to several obstacles:
goal conflicts
measurement problems
design problems
implementation problems
This leads to the hands-on versus hands-off argument.
18-24

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Looking Ahead: Chapter 19
Consumer Choice
After learning about this chapter, you should know
Why demand curves are downward sloping.
The nature and sources of consumer surplus.
The meaning and use of price discrimination.
How consumers maximize utility.
18-25

International Finance

–

How the value of a currency is measured.

LO20-2 The sources of foreign exchange demand and supply.

LO20-

How exchange rates are established.

LO20-

How changes in exchange rates affect prices, output, and trade

flows.

LEARNING OBJECTIVES

After learning about this chapter, you should know

CHAPTER

International Finance

Each country has its own currency (except in Europe, where many countries have adopted the euro).

International trade therefore involves two currencies – that of the exporter (which needs to pay bills in its currency) and that of the buyer (which pays for items using its currency).

20-02

It might be worthy to set up a situation where students in your state must exchange currencies to buy in an adjacent state.

Ask what differences there would be for, say, a Texan to have to exchange his Texdollars for Okiemoney when he visits Tulsa.

International Finance II

The relative values of the two currencies affect trade patterns and the answers to the questions of WHAT, HOW, and FOR WHOM to produce.

We will focus specifically on,

What determines the value of one country’s money compared to the value of another’s?

What causes the international value of currencies to change?

How and why governments intervene to alter currency values?

20-03

Since the answers to these questions are altered when prices change, it follows that a change in the exchange rate will alter prices and the answers to these questions.

Exchange Rates

Exchange rate: the price of one country’s currency in terms of another’s; the domestic price of a foreign currency.

If US $1.

0 = 1 euro, then US $1 = 0.

euro.

If US $1.25 = 1 euro, then US $1 = 0.

0 euro.

Exchange rates in terms of each other must be reciprocals of each other.

20-04

The reciprocity is vital. If it doesn’t exist, arbitrageurs will enter the exchange market and make it exist. They will buy the cheaper currency and simultaneously sell the expensive one. That increases the demand for the cheap one, driving its price up and increasing the supply of the expensive one, driving its price down.

Foreign Exchange Markets

U.S. travelers to Europe have a demand for euros and a supply of dollars.

European visitors to Disney World have a demand for dollars and a supply of euros.

20-05

It might be a good idea to sort out those who have a demand for dollars and those who have a supply of dollars.

Then do the same for those who have a demand for euros and those who have a supply of euros.

Foreign Exchange Markets II

U.S. exporters of goods to Europe get paid in euros. They have a supply of euros and a demand for dollars, which they need to pay their bills.

European exporters of goods to the U.S. get paid in dollars. They have a supply of dollars and a demand for euros.

20-06

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It might be a good idea to sort out those who have a demand for dollars and those who have a supply of dollars.
Then do the same for those who have a demand for euros and those who have a supply of euros.
6

Foreign Exchange Markets III

The market demand for U.S. dollars originates in:

foreign demand for American exports.

foreign tourists in America.

foreign demand for American investments.

currency speculators.

possible government intervention.

The market demand for U.S. dollars represents a market supply of foreign currency.

20-07

You could use this list to summarize the discussion you made for the previous slide.

Foreign Exchange Markets IV

The market supply of U.S. dollars originates in

American demand for imports.

American tourists abroad.

American investments in foreign countries.

Currency speculators.

Possible government intervention.

The market supply of U.S. dollars represents a market demand for foreign currency.

20-08

And also this list.

The Value of the Dollar

The value of the dollar is indicated by its purchasing power.

A BMW costing 30,000 euros must be priced in dollars if it is to be sold in the United States.

If 1 euro = $1.50, then it will be priced at $45,000.

If the exchange rate changed to 1 euro = $1.60, then the BMW’s price in the United States would rise to $48,000.

At this higher price, the quantity of BMWs sold will decrease.

20-09

Obviously this is a ceteris paribus situation. Excluded are transportation costs, advertising, interactions with competitors, etc.

The Value of the Dollar II

At a high euro price of the dollar, fewer will want to buy dollars and more will want to sell dollars.

There will be a surplus of dollars, and the dollar’s euro price will fall.

surplus
20-10

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Here we are simply showing that a foreign exchange market is simply a market, and it follows the rules of any market.
10

The Value of the Dollar III
At a low euro price of the dollar, more will want to buy dollars and fewer will want to sell dollars.
There will be a shortage of dollars, and the dollar’s euro price will rise.
The foreign exchange market will adjust to its equilibrium price.
shortage
20-11

The Value of the Dollar IV
Any increase in demand for the dollar or decrease in supply of the dollar will push the dollar price in euros up.
The dollar appreciates in value.
20-12

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Here we introduce the terms appreciation and depreciation.
12

The Value of the Dollar V
Any decrease in demand for the dollar or increase in supply of the dollar will push the dollar price in euros down.
The dollar depreciates in value.
20-13

The Value of the Dollar VI
When the dollar appreciates against the euro, the euro depreciates in value relative to the dollar.
When the dollar depreciates against the euro, the euro appreciates in value relative to the dollar.
20-14

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Again the reciprocal nature of the two currency values.
14

The Balance of Payments
The summary of all international money flows is contained in the balance of payments.
Balance of payments: a summary record of a country’s international economic transactions in a given period of time.
20-15

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BOP accounting aims at a zero balance. In order to get there, the accountants need all pertinent information. It is unlikely that this will happen. So there is the statistical discrepancy. Students don’t like such “fudge factor” things.
15

The Balance of Payments II
The balance of payments is divided into three parts:
current account balance (which includes the trade balance)
capital account balance
statistical discrepancy
20-16

The Balance of Payments III
The current account balance includes
Money flows in the trade balance.
Merchandise exports and imports
Service exports and imports
Money flows in investment income, government grants, and private funds transfers.
There is a net dollar outflow in the current account.
20-17

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Let’s keep it simple and use only dollars.
Essentially, we buy our imports from foreigners; we get the goods, they get dollars.
They use some of those dollars to buy our exports; they get the goods, we get dollars.
They have dollars left over. This is the net dollar outflow in the current account.
17

The Balance of Payments IV
The capital account balance includes
Inflow due to foreign purchases of U.S. assets.
Outflow due to U.S. purchases of foreign assets.
Increase in U.S. official reserves.
Increase in foreign official assets in U.S.
There is a net dollar inflow in the capital account.

20-18

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Those dollars left over are put into a bank as savings.
The bank lends them to clients who wish to buy dollar-denominated assets (not merchandise or services).
A good place to buy dollar-denominated assets is the United States.
The dollars flow back to the United States as payment for the assets purchased by foreigners.
This is the net dollar inflow in the capital account.
18

The Balance of Payments V
If we had perfect accounting, the outflow in the current account would balance the inflow in the capital account.
Because of several time lags in collecting data, the third part of the balance of payments is the statistical discrepancy, which indeed balances the two accounts.
Therefore, the balance of payments always must equal zero.

20-19

Market Dynamics
Depreciation: a fall in the price of one currency relative to another.
Caused by a decrease in demand or an increase in supply of the first currency.
Appreciation: a rise in the price of one currency relative to another.
Caused by an increase in demand or a decrease in supply of the first currency.
20-20

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This is a recap of depreciation and appreciation.
20

Market Dynamics II
The following could cause an increase in demand for the dollar
Foreign incomes rise faster than U.S. incomes.
Foreign prices rise faster than U.S. prices.
Foreigners have an increased need for U.S. goods.
U.S. interest rates become higher than in foreign countries.
20-21

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Here we look at why the demand or supply of a currency would change.
There are millions of participants in exchange markets every day. Each is acting in her own self-interest, trying to better herself.
Therefore, the demand for and supply of any currency will change frequently each day.
This activity is reflected by instantaneous changes in the exchange rates.
21

Market Dynamics III
The following could cause a decrease in demand for the dollar
U.S. incomes rise faster than foreign incomes.
U.S. prices rise faster than foreign prices.
Foreigners have an decreased need for U.S. goods.
U.S. interest rates become lower than in foreign countries.
Small changes like these occur all the time, and the $4 trillion foreign exchange market adjusts to those changes.
20-22

Do Exchange Rates Matter?
Daily participants in international trade prefer stable exchange rates to reduce the uncertainty in planning.
Any exchange rate change automatically alters the prices of exports and imports of that country, affecting many business decisions.
20-23

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It is easier to plan international activities (trade, asset purchase, business deals, travel) if the exchange rates are stable (unchanging).
Uncertainty will reduce this activity a bit because people want to avoid risk.
23

Should the Government Control Exchange Rates?
The goal would be to achieve exchange rate stability, but that could lead to other economic effects.
The standard way to eliminate instability in exchange rates is to adopt fixed exchange rates, where all major trading countries agree to keep the exchange rates between each currency fixed.
20-24

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This is government intervention into the free market, pure and simple. It is a price control on the exchange rates. It doesn’t matter that several countries collude to do it. From a buyer and seller point of view, it is a price control.
24

Should the Government Control Exchange Rates? II
The easiest way to fix exchange rates is to define each currency’s value against a common standard, such as a gold standard: an agreement by countries to fix the price of their currencies in terms of gold.
The problem with fixed exchange rates is that the demand for and the supply of each currency will continue to fluctuate, and a fixed exchange rate does not account for this.
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The main advantage of the gold standard is the inability of the government and the central bank in each country to debase the value of its money.
Since the United States abandoned the gold standard in 1973, the value of the dollar has dwindled enormously as the Fed has greatly increased the dollar supply.
25

Fixed Exchange Rates
With fixed exchange rates (at e1), the increase in demand for pounds generates a shortage of pounds.
More dollars flow out than flow in, so it creates a balance of payments (BOP) deficit for the United States and a BOP surplus for Britain.
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Market forces will not stop because of a fixed exchange rate.
26

Fixed Exchange Rates II
What to do?
Let the exchange rate rise (not acceptable), or the U.S. government intervenes by selling pounds and buying dollars.
Also, the U.S. could transfer gold to Britain for dollars.
This can be done once or twice, but cannot be kept up forever.
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There is an upper limit to the amount of pounds the government can sell or the amount of gold it can transfer.
Ultimately there will be a devaluation. This occurs when the devaluating country formally declares that its central bank will no longer support the currency. Henceforth the new fixed exchange rate is lower than before.
27

Fixed Exchange Rates III
Alternatively, erect protective barriers to eliminate the increased demand for British goods.
Or increase taxes to reduce disposable income and thereby, the demand for imports.
Or raise interest rates to slow spending and to draw foreign currency to the United States.
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The more a country defends its currency against changing demand and supply, the more it surrenders internal tools to combat problems such as high unemployment or high inflation at home. Devaluation will boost domestic inflation but lower unemployment as the country’s exports will look cheaper to customers.
Revaluation (happens in the other country) would lower inflation pressures but could cause increased unemployment as that country’s exports suddenly become more expensive.
28

Application: The Economy Tomorrow
Currency bailouts
Sometimes a country gets into deep trouble with its balance of payments and cries to the rest of the world for help.
A currency “bailout” is arranged, where the country in trouble is lent reserves to prop up its currency. The International Monetary Fund (IMF) usually leads the rescue.
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There have been bailouts of this type in Asia and in Latin America.
If it were not a euro country, there probably would not need to be a bailout for Greece (and possibly Spain and Italy).
29

Application: The Economy Tomorrow II
Currency bailouts
Some say that bailouts are ultimately self-defeating. If a country knows it will be bailed out, it might not practice sound economic policy.
The IMF requires the nation to adhere to more prudent monetary, fiscal, and trade policies.
Will other countries need a bailout? There are many reasons a country could get into trouble in the economy tomorrow.
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This is a moral hazard situation. Why bother to enact unpopular measures that could cost us the next election if we can rely on other countries to bail us out of our situation?
30

Revisiting the Learning Objectives
LO20-1 Know how the value of a currency is measured.
Exchange rates are the mechanism for translating the value of one national currency into the equivalent value of another.
An exchange rate of $1 = 2 euros means that one dollar is worth two euros in foreign exchange markets.
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Revisiting the Learning Objectives II
LO20-2 Know the sources of foreign exchange demand and supply.
The supply and demand for foreign currency reflect the demands for imports and exports, international investment, currency speculation, and overseas activities of government (and tourists).
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Revisiting the Learning Objectives III
LO20-3 Know how exchange rates are established.
There is a huge market in foreign currency that is worldwide. Daily changes in demand for and supply of each currency are immediately incorporated into the foreign exchange market.
This market will determine the current equilibrium price between two currencies.
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Revisiting the Learning Objectives IV
LO20-4 Know how changes in exchange rates affect prices, output, and trade flows.
Currency appreciations make foreign goods more costly to buyers of imports. Trade flows will decrease. Vice versa applies.
Currency appreciations make domestically produced goods more costly to export. Again trade flows will decrease. Vice versa applies.

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Looking Ahead: Chapter 21
Global Poverty
After learning about this chapter, you should know
How U.S. and global poverty are defined.
How many people in the world are poor.
What factors impede or promote poverty reduction.

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