Transcript Question #2 & Question #4

Question #2
.
3) Discuss some long term solutions to the
Federal Government’s rising national debt.
Points to consider in your answer:
•You must address entitlement spending
•Will you hurt the current economy (GDP) with your ideas?
•Are your ideas politically realistic?
•How quickly do you feel a need to solve the budget crisis?
Why is this happening….
A Demographic “Perfect Storm”
Growth of Entitlements
2011
Entitlement Spending &
Interest on Debt
2040?
Entitlement Spending &
Interest on Debt
50% of Gov’t Budget
Over 70% of Gov’t Budget
Question #4
.
3) Discuss whether the Federal Reserve should
keep interest rates at zero
Benefits
Interest
Rate
MS1
Costs/Risks
MS2
AS1
Inflation
Affects AD
i1
2
---------
i ------------------
MD
Qty of $
AD2
AD1
Real
GDP
Who “wins” with zero percent interest rates?
5.25%
0.0%
Keep in mind that there is no “free lunch” in economics
Zero percent interest rates help some and hurt others
They can help in the short run and potentially due damage in
The long run…
Money is not the same as Wealth!
• An increase in money supply does not lead to more wealth
MS
Wealth
Unchanged
Friedrich
Hayek
Economist from School of Austrian Economics
Believed in:
• Free Markets, Limited central bank action
• artificially low interest rates lead to Malinvestment
Friedrich Hayek
1899 - 1992
Bad investment that is only made because interest rates are
very low…..
Credit bubbles lead to malinvesment which is unproductive
•
does not shift PPF to right
This leads to an eventual “bust”
Hayek vs. Keynes Rap:
Is one right?
• http://econstories.tv/2010/06/22/fear-theboom-and-bust/
Quantitative Easing
• What is quantitative easing—link below
• http://en.wikipedia.org/wiki/Quantitative_easing
Economic Situation
GDP growth = -1.0%,
Unemployment = 10.0%
Little to no inflation
Solution:
Interest
Rate
Loose Monetary Policy
MS1
GDP
MS2
AS1
Inflation
Affects AD
i1
---------
i -----------------2
MD
Qty of $
AD2
AD1
Real
GDP
Socratic Seminar
Seminar Guidelines:
1) Worth 125 points
• Grade based on performance and preparation
2) Bring Notes & Come Prepared
• Each student must have notes
• All notes will be collected
3) If absent during seminar:
• 3-4 Paper will then be required—due Tuesday 4/5th