Brianna Kincaid AP Macroeconomics Summer Assignment What Every Manager Needs to Know about Macroeconomics: 1.

There are three areas of economics every manager should understand: macro, micro, and international. a. A good manager cannot get by without understanding the basics of economics. To understand one, you must understand all of them. 2. Since wages tend not to be flexible downward, unemployment is the general case. a. Professor Marshall explained that the classical theory of economics had stated that unemployment was impossible. It was believed that if someone was unemployed, they would seek to be hired at a lower wage and they would be hired. However, as explained by both John Maynard Keynes and Professor Marshall, because of institutional constraints, unions, and tradition, wages are not flexible downward and therefore would not decrease and create full employment. Therefore, full employment is the special case and unemployment is the general case. 3. Robots can make an automobile, but they will never buy one. a. What Professor Marshall means by this is that when people are employed, they have the money to buy consumer goods. When they are unemployed, they do not. When people who were previously employed are replaced by computers and robots, they become unemployed and therefore do not have the money to buy consumer goods. The employees, or the robots, do not earn the wages and do not buy consumer goods. As a result, the economy is affected negatively because there is both unemployment and underconsumption. 4. Government controls the economy by influencing the overall level of consumer expenditures, investment expenditures, and government expenditures. a. The government can control how much money it spends and how much money consumers spend by changing policies. Through this, it is able to control the economy and the employment level. As the amount of overall expenditures increases, then employment increases. 5. Investment behavior depends on interest rates. In fact, almost everything depends on interest rates. High interest rates discourage investment; low interest rates encourage investment. a. Professor Marshall explains that you would only really make an investment if the interest rates were low enough to make a profit. If the interest rate was too high to make a profit, you would not make the investment. The high interest rates would result in lower investment and lower economic activity. The lower interest rates would result in higher investment expenditures and higher economic activity. 6. The Federal Reserve Bank can influence investment by changing interest rates.

a. If the Federal Reserve Bank lowered interest rates, someone might make an investment because a profit could now be made. So, by simply lowering interest rates, the bank can increase investment expenditures and increase economic activity. It also works the other way around; if the Federal Reserve Bank increased interest rates, there would be fewer investments made and therefore a decrease in economic activity would occur. 7. To increase the level of economic activity, increase government expenditures or decrease taxes. To decrease the level of economic activity, decrease government expenditures or increase taxes. a. When the government increases its spending without increasing the taxes it takes out of the peoples salaries then there will be increased economic activity, or more water in the bath tub, as Professor Marshall explains. There will also be increased economic activity if the amount of taxes the government takes out of the peoples salaries decreases and therefore there would be more money for the people to spend in the consumer market. He also points out that it can work the other way around. Economic activity will decrease by decreasing the water flow into the bathtub, or decreasing government spending. Also, there would also be a decrease in economic activity if the government took more money out of the salaries of the people, and therefore they would have less money to spend in the consumer market. 8. Once the economy is at full employment, we must keep savings and taxes equal to government expenditures and investment. Any variation from this will cause inflation or unemployment. a. In order to keep the government stable at the desired point, which is full employment, the amount of savings and taxes that come out of a persons salary (the amount of water coming out of the bathtub) would have to be equal to government spending and investment expenditures (the amount of water going into the bathtub). If the amount of savings and taxes coming out of a persons salary is more than government spending and investments, then the economic activity will not be stable and it will decrease. And therefore, if the amount of savings and taxes coming out of a persons salary is less than government spending and investments, then the economic activity would not be stable and might overflow past full employment and cause inflation. 9. Essentially, the economy is controlled by the federal government, with fiscal policytaxes and expendituresand by the Federal Reserve Bank, with monetary policythe money supply and interest rates. The way these tools are used depends on the goals of the administration in power. a. The government can increase or decrease the amount of government spending to either create or eliminate jobs. The government can also decrease or increase taxes to either create or eliminate jobs. The Federal Reserve Bank can either increase or decrease the money supply or influence the interest rates and therefore influence investment.

10. Macroeconomics explains how you can control the trade-off between unemployment and inflation. a. Any policies that are used to reduce unemployment and create jobs, such as increasing government spending, decreasing taxes or increasing investments, would eventually lead to inflation. Any policies that are meant to reduce inflation will increase unemployment and economic activity. Macroeconomics explains how to control and balance the two. What Every Manager Needs to Know about International Economics: 1. The theory of comparative advantage demonstrates that everyone gains when countries specialize in what they can do most efficiently and trade the resulting products for thing they cannot produce efficiently. a. Instead of trying to make products that they cannot make efficiently, a country should make a product it can make easily and in surplus and trade it with a product that it cannot easily make. If everyone did this and just traded freely, everyone benefits. 2. The Bretton Woods Agreement, in essence, made the U.S. Dollar the international currency. Almost all international transactions after that were, and still are, denominated in dollars. a. Before World War II, countries used gold to cover the difference between exports and imports. If a country exported more than it imported, then other countries had to pay for the exports in gold. If a country imported more than it exported, then it would have to pay the extra gold. However, the system became slow and difficult to use. The U.S. dollar was made the international currency because the U.S., at the time, had most of the worlds gold and could make the dollar redeemable in gold. 3. In August of 1971, the United States canceled its pledge to redeem dollars for gold. This had the net effect of de-monetizing gold and making it like any other commodity that is traded in the marketplace and priced according to supply and demand. a. Because the United States had less gold than there was dollars to be redeemed, President Nixon declined to redeem any more dollars. The rest of the world could then only use those dollars to buy U.S. products. After this, gold was not involved in the monetary system. Instead, its price serves as a notice of inflation. 4. High interest rates: discourage domestic investment, and cause the value of the dollar to rise. This increases imports, and decreases exports, which costs us jobs. All of this allows us to run balance of payments deficits, which are financed by investments from abroad. a. If interest rates on investments are higher in the US than in foreign countries, that would encourage foreign investors to invest their money in the United States. This means there is a greater demand for dollars (because the investors would exchange money for dollars and get dollars back). Our imports would be cheaper than our exports, so we could import more than we export. This would keep inflation down but increase unemployment. Because of the amount of dollars coming in from foreign

investors, we can import more than we export and use those dollars to cover the difference.