According to the information collected by the censuses, in 2013 about 14.5% of the families of the United States of America were poor (USA Census Bureau, 2014). Suppose someone comes up with the idea of asking the government to produce more money and for the new money to be distributed among families living in poverty. The person who came up with the "bright idea" asks you a series of questions: Which government institution can make more money? How do you produce it? Why did this idea not come to anyone before? Do you agree that this is a good idea? Why or why not?

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Nestor RutherfordLv2

8 Mar 2018

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1. Why Niall Ferguson thought that the expansionary fiscal policy (or government deficit) could produce crowding-out effect? You can explain by using the IS-LM model or you can use the logic of loanable funds theory.

Niall Ferguson believed that expansionary fiscal policy could produce a crowding-out effect. Ferguson believed that if the government tried to increase demand during the crisis it would cause the real interest rate to increase. He theorized that if the government tried to boost the economy through deficit spending it would cause the interest rate to rise, which in turn would crowd-out investors and consumers. The interest in the deficit would lead to an increase in the demand for loanable funds, which would lead to an increase in interest rates. Ferguson stated "The lesson of economic growth is very clear. Economic growth does not come from state-led infrastructure investment. It comes from technological innovation, and gains in productivity, and these things come from private sector, not from the state."

2. Why Paul Krugman thinks that Niall Ferguson was wrong and thought that government deficit could not produce a crowding-out effect? In other words, please explain Krugman's Liquidity trap .

Paul Krugman disagreed with Ferguson and believed that the government deficit could not produce a crowding out effect. Krugman's liquidity trap: Private demand is so low that even if the short-term interest rate is 0% spending is less that what is needed for full employment. Normal monetary policy of the central bank purchasing short-term debts with new money is ineffective. Krugman argues that a major issue during the crisis was people wanting to save money combined with the private sector being far less likely to invest. He referred to this a "savings glut". It was argued that the federal reserve was playing the part that the private banking system through buying private securities and the federal government was playing the roll that business wasn't by engaging in investment. Due to the liquidity trap excess demand for savings is not going to drive interest rates up. Krugman stated " Government borrowing gives some of those excess saving a place to go and in the process expands overall demand, and hence GDP. It does not crowd out private spending, at least not until the excess supply of savings has been sopped up, which is the same thing as saying not until the economy has escaped from the liquidity trap."

3. In the discussion, other discussants such as George Soros and Robin Wells pointed out some interesting issues. Please provide at least one thing that you agree and one thing that you disagree. Discuss in details why you think so.

I agree with Soros view that the publics view of the financial markets has been forever changed. " Financial markets namely that they tend toward equilibrium, and that equilibrium is disturbed by extraneous forces, outside shocks. But the finical system collapsed of its own weight." I feel like this is a situation in which it takes a very long time to build trust, but that trust can be lost instantly. The crash has challenged the felling of security that people once felt in the banking system. The idea of the market regulating itself is fading, it wasn't until the government stepped that people felt reassured in the banking system. I believe this will lead to a period of government regulation that wouldn't have arose without this change in view. I disagree with robin Wells' view that the US needs to shift towards protectionism. I believe that free trade is good for everyone as long as there is a comparative advantage. If the US moves toward protections as a result of the deficit it will slow economic growth and place us at a disadvantage compared to countries with free trade. Not to mention consumers in the US will be placed with the burden of higher prices on goods.

Please make comments to the discussion I provided above(at least 300 words). And you can start with "I agree with you on some points... But I disagree with you on some points".

1. Scarcity in economics means: we do not have sufficient resources to produce all the goods and services we want. the wants of people are limited. there must be poor people in rich countries. shortages exist in nearly all markets. You like to read Vogue and Sports Illustrated. You have only $5 to spend, so you only buy Sports Illustrated. The statement that best represents this economic concept is: resources are scarce. the real cost of something is what you must give up to get it. positive economics explains how the economy actually works. economic models are used to answer âwhat ifâ questions. . If the state government allocates additional spending on education, the opportunity cost is: zero. the dollar amount of the additional spending. considered only if additional taxes need to be raised to fund the spending. measured in terms of the best alternative use for that money. For a student that owns his or her own home and doesn't plan to live in the dorm the cost of going to college is: tuition and the cost of housing. tuition, the cost of housing, and the cost of books. tuition, the cost of books, and forgone income. forgone income only. Keynesian economics stressed: the importance of total spending. the self-correcting power of free markets. the long run. that the Depression should run its course to bring down the high cost of living. The economic policy that uses changes in government spending and taxes to affect the overall spending in the economy is known as: a tax-and-spend policy. monetary policy. fiscal policy. free-trade policy. When building a model, economists: simplify reality in order to highlight what really matters. attempt to duplicate reality in all of its complexity. ignore the facts and instead try to determine what the facts should be. are careful to avoid the scientific method. Which is a normative statement? The minimum wage has not kept pace with inflation. The minimum wage is an important tool in fighting poverty and should be increased. The minimum wage can create higher unemployment for teens and unskilled workers. A higher minimum wage is expected to increase the price of a fast-food cheeseburger. Which is an example of a positive statement? The poverty rate should be 4%. A high rate of economic growth is a more important economic goal than a low rate of unemployment. The federal government pays for 46% of U.S. health care costs. Everyone in the country should be covered by national health insurance. Economists may disagree about policies because they: may approach the issue using the same sets of values. may use different economic models. enjoy disagreeing with each other. only consider issues in positive economics.

Topic:
How would you explain the finding that people in high-income economies seem happier than people in low-income economies, but, over time, people in high-income economies do not seem to be any happier even if their country grows richer? Briefly discuss.

Optional Reading:

Income and Happiness

The Declaration of Independence in 1776 identified âcertain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness.â This did not guarantee happiness but did establish the pursuit of happiness as an âunalienableâ right, meaning that right cannot be taken away, given away, or sold. Eighteenth century philosopher and social reformer Jeremy Bentham argued that government policy should promote the greatest happiness for the greatest number of people.

Many people today apparently agree. In recent polls, 77 percent of Australians and 81 percent of Brits believed that a government's prime objective should be promoting the greatest happiness rather than the greatest wealth. The United Nations in 2007 sponsored an international conference on âHappiness and Public Policy.â Thailand now compiles a monthly Gross Domestic Happiness Index. Even China has joined in the fun reporting a happiness index based on polling results about living conditions, income, the environment, social welfare, and employment. Australia, Canada, and the United Kingdom are also developing happiness indexes.

Economists have long shied away from asking people how they feel, preferring instead to observe their behavior. But more now see some value in asking questions. In the most extensive of polls, the Gallup organization asked people in 130 countries: âHow satisfied are you with your life, on a scale of zero to ten?â The results, reported in 2007, are not surprising. Most people in the high income areas, such as the United States, Europe, and Japan, said they are happy. Most people in the poor areas, especially in Africa, said they are not. Also, within a given country, income and happiness are positively related. After evaluating all the results of the Gallup world poll, Angus Deaton of Princeton concluded: âThe very strong international relationship between per capita GDP and life satisfaction suggests that, on average, people have a good idea of how income, or the lack of it, affects their lives.â 8

So these results are no surprise. What does puzzle economists is that other surveys suggest that in affluent countries people do not seem any happier over time even though each generation became richer than the last. For example, in the United States, the proportion of people who say they are happy has stayed about the same despite 60 years of economic growth. In Japan, happiness responses actually declined despite a substantial increase in real income over the last 50 years.

Here are two possible explanations. First, people begin taking for granted those luxuries they most desired. For example, two generations ago color TVs, automobiles, and major appliances were luxuries, but now they are must-items for most households. Computers and flat screen HDTVs will soon move from luxuries to necessities. As each generation attains a higher standard of living, people become less sensitive to the benefits, they take them for granted, and thus they say they are no happier.

Second, research suggests that what matters is not just the absolute level of income but income relative other people in the reference group. Imagine you have a choice between (1) earning $50,000 a year while others in your reference group make $25,000 or (2) earning $100,000 a year while others make $250,000 (suppose, too, that prices remain the same, so $100,000 is double the real income of $50,000). Which would you prefer? Studies show that when people face this hypothetical choice, most pick the $50,000 option. That is, they prefer to make more than others even if that means a lower real income. Thus, if all incomes rise on average over time, this does not affect that aspect of happiness linked to oneâs relative standing. As the social critic H. L. Mencken long ago observed, "A wealthy man is one who earns $100 a year more than his wife's sister's husband."

SOURCES: Daniel Gilbert, Stumbling On Happiness, (New York: Knopf, 2006); Marina Kamenev, âRating Countries for the Happiness Factor,â Business Week, 11 October 2006; Angus Deaton, âIncome, Aging, Health, and Wellbeing Around the World: Evidence from the Gallup World Poll,â Princeton Working Paper, (August 2007); and âWhere Money Seems to Talk,â Economist, 12 July 200