Discussion

07/28/2012 7:47pm
Main discussion 1 of 1
•	Explain in your own words the process by which banks “create” money.
 
According to our text (page 392), banks are able to generate funds by allowing people to deposit their money and making loans available to those that qualify.  So how it all works is by a person making that first deposit, and the bank’s money supply increases by how much is deposited (considered stage two).  Once that happens, it’s like a domino effect; things start happening.  The initial monetary operation doesn’t have any effect on the bank’s available money supply, but soon thereafter the bank allows another person to take out a loan (this can be considered stage three).  So now you have the original deposit, plus what the bank has just loaned – thus the bank’s money supply continues to increase.

•	Discuss the impact of that ability to create money on the economy during an inflationary gap, as well as during a recessionary gap. 

In our text (page 428), it discusses what the Fed does concerning these two terms.  The Fed usually increases interest rates whenever the output is get higher.  And when the output gap decreases, or begins falling, the Fed cuts interest rates.  

In the case of a recessionary gap, which is where inflation has become embedded within our economy, the Fed must use expansionary monetary policy to basically close that gap.  So how do they do that?  They do it by increasing the money supply.  An increase in the money supply creates a positive short-term effect.  However, many believe this is the way an economy should be stabilized.  Also, sometimes the Fed prints money just so the government can pay its own bills.
•	Considering the higher rates of unemployment and the likelihood of lower prices during a recessionary gap, do banks with their lending policies, contribute to a recovery back to potential output, or hinder that recovery? Why do you believe your answer to be correct? What about during an inflationary gap? 

I believe the bank’s lending policies do contribute to an economic recovery (unsure about back to a 100% output).  The inflationary gap is basically just when the aggregate output falls short of potential output – while this is bad in its own way, a recessionary gap is much more serious, because it’s when the inflationary gap has become embedded and isn’t so easily escaped.  Any lending that banks do obviously pumps money back into the economy, which is a good thing.  I think banks should loan, loan, loan; however, I do realize it is them taking all the risks.  As far as inflationary gaps, bank lending can also reduce these, especially when it comes to small business.

References
Krugmen, P., & Wells, R. (2009). Macroeconomics Second Edition. New York: Worth Publishers.

07/28/2012 7:47pm
Student 1 of 2
So, I saw this topic as really a slap in the face (in our economic faces that is).  We already knew that banks can make a difference in recessions, and it really is brazen for banks to be greedy with loans during the times when we need them most.  I see banks as potentially a good equalizer during sagging economies, but they have to lend.  And, two or three years ago (maybe even now), banks were just not lending the way they could.  Now maybe the Professor can tell us why they acted like this.
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Eddie Jackson
GOK - Philosophy Major/Liberal Studies
http://eddiejackson.net  university page
07/28/2012 8:04pm
Student 2 of 2
So, in the end they may or may not have the exact same level of income.  I’ve personally seen them having less income due to shifts in available jobs, resources, assets, as well as lingering price increases that never go back to where they were.  So even if they are making the same paycheck, they are bringing home a lot less of it.  And, like you said, there’s also the new debt of the loan. But still, receiving loans seems to be a good short-term solution to many issues in a sagging economy.

As long as there is a constant flow of purchases, even during recessions, we’ll eventually come out of it.  My theory is, recessions can’t last forever (at least by what we know of past recessions). 
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Eddie Jackson
GOK - Philosophy Major/Liberal Studies
http://eddiejackson.net  university page
RE: VIDEO 2 	
Edward Jackson 	
7/29/2012 4:06:21 PM	

	
One thing the video did point out (which worries me) is as Europe falls into a recession, deflation will happen.  Deflation will attribute to mass unemployment and less demand.  I watched another video listed at the end of this video that said Greece, Italy, and Spain are only the beginning.  

I’m wondering what we can do (quickly) to strengthen our own economy and prepare for the worst of it (which is yet to come).

Professor, what can we do as citizens to prepare for this?

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Eddie Jackson
GOK - Philosophy Major/Liberal Studies
http://eddiejackson.net  university page	

RE: VIDEO 1. Milton Friedman 	
Edward Jackson 	
7/31/2012 7:33:57 PM	

	
Inflation, as one the evils of our times, I got a chuckle out of that.  

During the gold rush, I like because there was “more” gold, all the prices went up.

Wow, I didn’t realize it was a capital offense (in the past) to destroy someone’s tobacco crop; punishable by death.  Taxation without representation seems way more serious than I thought.  I can’t believe the guy in the video (Robert Crawford) was paying $6,000 in taxes, and only making $18,000 a year – I find that extremely hard to believe (I’m sure he was claiming head of household with a wife and three kids).

I didn’t even know that the government could “freeze” prices – nationally.  Is that the same as price caps?  Of course, according to the video, those controls just make matters worse.

So, it seems like economic freedom is what leads to a successful economy.  And Inflation, in our country, is caused in Washington, DC – as that’s where they print money.  Stop printing money, and inflation will be reduced.

I like how he compared alcoholism to inflation (printing money).

Something I learned is that basically our whole tax system is built on and from the Great Depression.

Reducing government spending, and reducing taxes, can all lead to a decrease in inflation.
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Eddie Jackson
GOK - Philosophy Major/Liberal Studies
http://eddiejackson.net  university page