Fed Policy & Outlook

http://www.federalreserve.gov/newsevents/press/monetary/fomcminutes20120125.pdf

Read this on current and upcoming Fed policies

- Mr. Joy

Midterm Comments, and Course Direction moving forward

While I can't discuss the contents of the midterm, I can say this: students who feel they need a crutch, be it asking questions, a certain electronic devise, etc., had better adapt, and quickly.  We are doing ourselves no favors by having testing scenarios that do not accurately depict the testing scenario this May, nor future testing scenarios next year.

From that podcast we listened to last week about setting priorities and having goals, adversity and hardship go hand-in-hand with success.  Without understanding the bitterness of defeat, we can never truly understand the joy that comes from our triumphs.  That contrast needs to be truly ingrained as a part of your experience today as high school students, and tomorrow as university students and professionals.  Please take the time to ask questions (in-class, after-class, email, etc.) of me, but don't be afraid to ask them of yourselves either.

Next week is a short week, as is the week of 2/21.  2/27 is a full week, however, as is the week of 3/5.  As it stands right now, we will complete chapter 15, 16, and 17 for the next midterm, and then ch. 18, 19, 37, and 38 for the final midterm of the semester.

Chapter 15 homework will be due next Tuesday, 2/21.  However, Chapter 16 homework will be due 2/24.  I would have had Chapter 15 be due 2/17, but its a holiday.  I also aim to have Chapter 17 due 3/2, with a midterm the week of 3/5.  I am also thinking about having a 2-day midterm on both 4/4 and 4/5, due to tight schedules on both days.  This would give us the weeks of 4/16, 4/23, 4/30, and 5/7 solely for exam prep and Country-project research in the library.  During those four weeks, we will practice multiple choice questions, complete several 45-minute free response sections, dive deeper into domestic and international macroeconomic analysis, and challenge ourselves to succeed where others have failed.

The homework for Chapter 15, "Monetary Policy," is #2, 3, 4, 5, 6, 7, 8, and 10.  (only 8 questions!).  Chapter 16 is #1, 2, 3, 4, 6, 7, 8, and 9 (again only 8 questions!).  The most important goal of these chapters is to definitively understand the role of monetary policy in maintaining economic balance and growth, as well as understand the Phillips Curve.  You will be asked about the Phillips Curve on the AP exam, so the better you understand it, the more successful you will be.

Have a good weekend.  Hopefully will see some of you tomorrow night at the "Snowflake Serenade."  $15 at the door, or so I'm told.

Mr. Joy

Question 17

This question has to do with finding financial statements of different banks, all of which is public information.

First, go to www.fdic.gov
Second, on the right hand side, under "Find My Bank," select California and then type in your bank name. There is also an advanced search that allows you to enter the City and Zip Code.  In 95501, there are several active banks that the FDIC has information for.  They can be found using this search tool:
http://www2.fdic.gov/idasp/main3.asp
They are:
1.  Bank of America National Association (based in North Carolina)
2.  JP Morgan Chase Bank National Association (based in Ohio)
3.  Redwood Capital Bank (based in California)
4.  US Bank National Association (based in Ohio)
5.  Umpqua Bank (based in Oregon)
6.  Wells Fargo Bank National Association (based in South Dakota)

This question requires you to look at total assets, total liabilities, total deposits, net income, and the number of branches from 2010 to 2011.  All the data can be found under "Institution Directory - 2 Year Financial Report" on the bank's main FDIC page.  You should be able to find all the data on that sheet.  Be sure and compare 2010 to 2011.

Also, you don't have to give a report on your specific bank.  There are plenty of other banks that you could do research on.  Instead of saying you live in Eureka, CA (95501), say you live in New York, NY (10010), and you will find more than 350 different financial institutions.

You can also compare these banks from the present time to the end of 2008, to see how their assets and liabilities have changed as a result of the crisis.  For example, Goldman Sachs' total assets have gone from $163 Billion in 2008 down to $105 Billion at the end of 2011.

Midterm Set for Friday, February 10th

Hello All,
I didn't know whether the Midterm would be next Thursday or Friday, but Mr. Shanahan's weekly staff bulletin has solved this problem.  During 4th on Thursday, we will all be in the library for scholarship work with Cassandra of the Humboldt Area Foundation.  I encourage you to take a close look at the bulletin for today to look at the different scholarships that are available, as well as explore others.

This is what next week will look like:
Monday - Review Chapter 14 HW
Tuesday - Collect Chapter 14 HW, Ch. 12-14 Review passed out
Wednesday - Final Questions about the midterm
Thursday - Scholarship workshop
Friday - Midterm

We will start with Chapter 15 the following Monday, 2/13.

Mr. Joy

WSJ GOP Editorial

The GOP Deserves to Lose

That's what happens when you run with losers.

• By BRET STEPHENS

Let's just say right now what voters will be saying in November, once Barack Obama has been re-elected: Republicans deserve to lose.

It doesn't matter that Mr. Obama can't get the economy out of second gear. It doesn't matter that he cynically betrayed his core promise as a candidate to be a unifying president. It doesn't matter that he keeps blaming Bush. It doesn't matter that he thinks ATMs are weapons of employment destruction. It doesn't matter that Tim Geithner remains secretary of Treasury. It doesn't matter that the result of his "reset" with Russia is Moscow selling fighter jets to Damascus. It doesn't matter that the Obama name is synonymous with the most unpopular law in memory. It doesn't matter that his wife thinks America doesn't deserve him. It doesn't matter that the Evel Knievel theory of fiscal stimulus isn't going to make it over the Snake River Canyon of debt.

Above all, it doesn't matter that Americans are generally eager to send Mr. Obama packing. All they need is to be reasonably sure that the alternative won't be another fiasco. But they can't be reasonably sure, so it's going to be four more years of the disappointment you already know.

Getty Images

Is this the best they can do?

As for the current GOP field, it's like confronting a terminal diagnosis. There may be an apparent range of treatments: conventional (Romney), experimental (Gingrich), homeopathic (Paul) or prayerful (Santorum). But none will avail you in the end. Just try to exit laughing.

That's my theory for why South Carolina gave Newt Gingrich his big primary win on Saturday: Voters instinctively prefer the idea of an entertaining Newt-Obama contest—the aspiring Caesar versus the failed Redeemer—over a dreary Mitt-Obama one. The problem is that voters also know that Gaius Gingrich is liable to deliver his prime-time speeches in purple toga while holding tight to darling Messalina's—sorry, Callista's—bejeweled fingers. A primary ballot for Mr. Gingrich is a vote for an entertaining election, not a Republican in the White House.

Then there is Mitt Romney, even now the presumptive nominee. If Mr. Gingrich demonstrated his unfitness to be a serious Republican nominee with his destructive attacks on private equity (a prime legacy of the Reagan years), Mr. Romney has demonstrated his unfitness by—where to start?

Oh, yes, the moment in last week's debate when Mr. Romney equivocated about releasing his tax returns. The former Massachusetts governor is nothing if not a scripted politician, and the least one can ask of such people is that they should know their lines by heart. Did nobody in Mr. Romney's expensive campaign shop tell him that this question was sure to come, and that a decision had to be made, in advance, as to what the answer would be? Great CEOs don't just surround themselves with consultants and advance men. They also hire contrarians, alter egos and at least someone who isn't afraid to poke a finger in their chest. On the evidence of his campaign, Mr. Romney is a lousy CEO.

But it's worse than that. The usual rap on Mr. Romney is that he's robotic, but the real reason he can't gain traction with voters is that they suspect he's concealing some unnameable private doubt. Al Gore and George Bush Sr. were like that, too, and not just because they were all to the proverbial manor born. It's that they were basically hollow men.

Thus the core difference between Mr. Romney and Mr. Obama: For the governor, the convictions are the veneer. For the president, the pragmatism is. Voters always see through this. They usually prefer the man who stands for something.

What about Rick Santorum and Ron Paul? They are owed some respect, especially for the contrast between their willingness to take a stand for principle against the front-runners' willingness to say anything. But Messrs. Santorum and Paul are two tedious men, deep in conversation with some country that's not quite America, appealing to a devoted base but not beyond it. Sorry, gentlemen: You're not going anywhere.

Related Election 2012 News

• Romney on the Attack
• Romney Paid $3 Million in Taxes in 2010
•  Complete Coverage: Election 2012

Finally, there are the men not in the field: Mitch Daniels, Paul Ryan, Chris Christie, Jeb Bush, Haley Barbour. This was the GOP A-Team, the guys who should have showed up to the first debate but didn't because running for president is hard and the spouses were reluctant. Nothing commends them for it. If this election is as important as they all say it is, they had a duty to step up. Abraham Lincoln did not shy from the contest of 1860 because of Mary Todd. If Mr. Obama wins in November—or, rather, when he does—the failure will lie as heavily on their shoulders as it will with the nominee.

What should readers who despair of a second Obama term make of all this? Hope ObamaCare is repealed by the High Court, the Iranian bomb is repealed by the Israeli Air Force, and the Senate switches hands, giving America a healthy spell of Hippocratic government.

All perfectly plausible. And the U.S. will surely survive four more years. Who knows? By then maybe Republicans will have figured out that if they don't want to lose, they shouldn't run with losers.

Write to bstephens@wsj.com

Game Theory Returns!

Skip to the third section of this Colbert Report show:
http://www.hulu.com/watch/322350/the-colbert-report-mon-jan-23-2012

MIT Lecture to watch

See: http://mitworld.mit.edu/video/875

Exam Outline

There will be ten multiple choice, followed by four free-answer questions based on old midterm questions.  Total will be 250 points.  I completed the entire exam in under 50 minutes, so 90 min. should be plenty for all of you.  Of course, should you require more time, it will be available for you.

Best,
Mr. Joy

National Review on President Obama's Re-Election

NATIONAL REVIEW ONLINE          www.nationalreview.com           PRINT

The Corner

The one and only.

Obama Might Be Reelected . . . By Victor Davis Hanson January 6, 2012 2:54 P.M. . . . if he just stays silent and undercover in Hawaii all year. It was always unlikely that an inherently dynamic nation like the U.S. could stay in a recession or a near-recession slowdown for five years (since late 2007), and we should expect a mild rebound in 2012, at least by election time — before the deeper reckoning with our massive debt and expansionary money policy comes due. Based on the Chicago-style promises we’re now hearing — debt relief for students, mortgage relief for the underwater homeowner, pay increases for federal workers, non-enforcement of immigration law for the Latino bloc, and recess appointments for the unions and the left-wing base — in 2012 there will be a huge turnout of professional elites, environmentalists, gays, minorities, unions, youth, the indebted, and the needy, with which blocs the Democrats will seek to make up for the loss of the “clinger” states and somehow reach 51 percent of the vote. I guess that alienating the independents and Reagan Democrats, rather than winning them over, is the new fallback strategy, based on the premise they are lost anyway and what chafes them excites the base. Obama had a Democratic Congress for two years, his populism is rendered suspect by his Wall Street fundraising and  intimacy with the likes of Jon Corzine and Peter Orszag, and there have been scandals ranging from Solyndra to Fast and Furious — but I don’t think these will be real issues. The message will probably be: “I, Obama, ended two wars, killed bin Laden, shifted money from the wealthy and defense waste to the middle classes, and would have done even more had an obstructive Congress not stopped me.” We should expect that, despite his obvious delight in public adulation, the president will be probably be less seen and heard. In December, his virtual absence from the public arena did wonders for his poll numbers, unlike his Kansas-type speechifying. The less people see and hear him, the more they think of the old image of Obama rather than the present reality. The far louder Republicans will be cast in their traditional role — the Scrooges forcing necessary budget cuts on the backs of the recipients of Obama’s largess as they work to preserve “tax cuts for the wealthy” — in a pretty straightforward us-vs.-them pitch. There is not a lot for a low-profile Obama to run on, since most everything the old high-profile president has done — Obamacare, cash-for-clunkers, the stimulus, the GM/Volt mess, the Solyndra-like partnerships, the $5 trillion in borrowing, added regulations, and tabling gas and oil development — either is unpopular or hasn’t worked, often both. So Obama will run on the proposition that there were three Bush terms, from 2001 to 2011; that he, the middle-class warrior, will finally be able to free Americans from the damage done by Bush; and, of course, that things would have been even worse had he not put up the fight he did. Quietly borrowing more money is much more popular than loudly stopping it. From the fractious Republicans, in between their attack ads on one another, we still haven’t heard of a simple four- or five-point agenda that rebuts the above, e.g., calls for massive new oil and gas development that will create jobs, new wealth, and greater energy independence; pruning back the size of government; repealing regulations and unleashing the private sector through budget discipline and a complete overhaul of the tax code; entitlement reform; and the preservation of defense. Permalink

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Old Midterms - Complete

Economics Midterm 1 (100 points) – September 23, 2011

1. A professional basketball team has a new assistant coach.  The assistant notices that one player (aka “the star player”) scores on a higher percentage of her shots than the other players.  Based on this information, the assistant suggests to the head coach that this star player should take all the shots.  That way, the assistant reasons, the team will score more points and win more games.  On hearing this suggestion, the head coach fires his assistant for incompetence.  What was wrong with the assistant’s idea? (15 pts.)
2. How will a reduction in the number of hours worked each day affect an economy’s production possibilities curve (all other variables being held constant)? (7 pts.)
3. Susan can pick 4 pounds of coffee in an hour or 2 pounds of nuts.  Tom can pick 2 pounds of coffee in an hour or 4 pounds of nuts.  Each works 6 hours per day. (35 pts.)
1. What is the maximum number of pounds of coffee the two can pick in a day?  
2. What is the maximum number of pounds of nuts the two can pick in a day? 
3. If Susan and Tom were picking the maximum number of pounds of coffee when they decided that they would like to begin picking 4 pounds of nuts per day, who would pick the nuts, and how many pounds of coffee would they still be able to pick? 
4. Now suppose Susan and Tom were picking the maximum number of pounds of nuts when they decided that they would like to begin picking 8 pounds of coffee per day.  Who would pick the coffee, and how many pounds of nuts would they still be able to pick? 
5. Would it be possible for Susan and Tom to pick a total of 26 pounds of nuts and 20 pounds of coffee each day?  If so, how much of each good should each person pick? 
6. Is the point (30 pound of coffee per day, 12 pounds of nuts per day) an attainable point?  Is it an efficient point?  What about the point (24 pounds of coffee per day, 24 pounds of nuts per day?)
7. On a graph with pounds of coffee per day on the vertical axis and pounds of nuts per day on the horizontal axis, show all the points you identified in question 3 parts a-f.  Connect these points with straight lines.  Is the result the PPC for the economy consisting of Susan and Tom? 
4. Distinguish between the meaning of the expressions ‘change in demand’ and ‘change in the quantity demanded.’  Draw graphs to illustrate your point.  (15 pts.)
5. Last year a government official proposed that to protect the poor from rising gasoline prices, a price cap of $3.00 per gallon.  The average price of gasoline in the United States is now $3.556.  (28 pts.)
1. If this proposal had been enacted by Congress and the President, would the $3.00 mark be a price ceiling or a price floor?
2. What would the relationship be between the supply and demand of the price of gasoline? 
3. What social behaviors would be observed in terms of gasoline purchasing?  Why?
4. Draw a supply and demand graph showing the current equilibrium point ($3.556) and the proposed price cap of $3.00.  The United States consumes 378 million gallons of gasoline per day, according to the Department of Energy. 

Economics Midterm 2 (100 points) – October 19, 2011

6. Mr. Brown and nine friends are having dinner at the Moonstone Grill north of McKinleyville.  To simplify the task of paying for their meal, they have agreed in advance to split the cost of their meal equally, with each paying one-tenth of the total check.  Having cleared the entrée dishes, the waiter arrives with the dessert menu, on which Mr. Brown’s favorite items are pumpkin pudding ($10) and chocolate mousse ($6).  Mr. Brown’s reservation prices for these items are $4 and $3, respectively.  (27 pts)
1. If Mr. Brown is the only person who is interested in dessert, will he order dessert, and, if so, which one?  What are his economic surpluses from the two items?  (12 pts)
2. Would he order dessert if he were dining by himself?  (7 pts)
3. Would Mr. Brown order dessert if there were only 5 people splitting the check instead of 10?  (8 pts)
7. In the country Breakfastland, which has a competitive market economy, citizens eat only bagels and cereal for every meal. Suppose the demand for bagels rises dramatically while the demand for breakfast cereal falls.  Briefly explain how Breakfastland’s competitive market economy will make the needed adjustments to reestablish an efficient allocation of society’s scarce resources. (8 pts)
8. Suppose that a U.S. worker can produce 1000 pairs of shoes or 10 industrial robots per year.  For simplicity, assume there are no costs other than labor costs and firms earn zero profits.  Initially, the U.S. economy is closed.  The domestic price of shoes is $30 a pair, so that a U.S. worker can earn $30,000 annually by working in the shoe industry.  The domestic price of a robot is $3,000, so that a U.S. worker can also earn $30,000 annually working in the robot industry. 

Now suppose that the U.S. opens trade with the rest of the world.  Foreign workers can produce 500 pairs of shoes or 1 robot per year.  The world price of shoes after the U.S. opens its markets is $10 a pair, and the world price of robots is $5,000. (35 pts)

1. What do foreign workers earn annually, in dollars, within these two industries?  (4 pts.)
2. When it opens to trade, which good will the United States import and which will it export?  (4 pts.)
3. Find the real income of U.S. workers after the opening to trade, measured in (1) the number of pairs of shoes annual worker income will buy and (2) the number of robots annual income will buy.  Compare to the situation before the opening of trade.  Does trading in goods produced by “cheap foreign labor” hurt U.S. workers?  (20 pts.)
4. How might your conclusion in part “c” be modified in the short term, if it is costly for workers to change industries?  What policy or government response might help with this problem?  (7 pts.)
8. In studying for his economics final, Sam is concerned about only having two things: his grade and the amount of time he spends studying.  A good grade will give him a benefit of 20; an average grade, a benefit of 5; and a poor grade, a benefit of 0.  By studying a lot, Sam will incur a cost of 10; by studying a little, a cost of 6.  Moreover, if Sam studies a lot and all other students study a little, he will get a good grade and they will get poor ones.  But if they study a lot and he studies a little, they will get good grades and he will get a poor one.  Finally, if he and all other students study the same amount of time, everyone will get average grades.  Other students share Sam’s preferences regarding grades and study time.  (30 pts.)
1. Model this situation as a two-person prisoner’s dilemma in which the strategies are to study a little and to study a lot, and the players are Sam and all other students.  Include the payoffs in the matrix.  (20 pts)

Economics Midterm 3 (100 points) – November 18, 2011

10. Here are some data for an economy.  All figures are in millions of dollars (20 pts)

Consumption expenditures                                                    $600

Exports                                                                               $75

Government purchases of goods and services                        $200

Construction of new homes and apartments                           $100

Sales of existing homes and apartments                                $200

Imports                                                                               $50

Beginning-of-year inventory stocks                                         $100

End-of-year inventory stocks                                                 $125

Consumption of fixed capital                                                 $25

Business fixed investment                                                    $100

Government payments to retirees                                          $100

Household purchases of durable goods                                  $150

1. Find GDP and explain your calculation (8 pts)
2. Find NDP and explain your calculation (8 pts)
3. If this economy has 18,000 people, what is its GDP per capita? (4 pts)
10. The outputs and prices of goods and services in Country X are shown in the table below.  Assume that 2009 is the base year. (30 pts)

	2009 Quantity	2009 Price (base year)	2010 Quantity	2010 Price
Food	6	$2.50	8	$2.50
Clothes	5	$6	10	$10
Entertainment	2	$4	5	$5:

                                                               i.      

a. Calculate the following:

                               i. The nominal gross domestic product in 2010 (5 pts)

                                                             ii.      The real GDP in 2010 (10 pts)

2. If in one year the price index is 50 and in the next year the price index is 55, what is the rate of inflation from one year to the next? (5 pts)
3. Assume that 2011’s wage rate will be 3% higher than 2010 because of inflationary expectations.  The actual inflation rate is 4%.  At the beginning of 2011, will the real wage be higher, lower, or the same as 2010?  (5 pts)
4. Assume that Mr. Brown gets a fixed-rate loan for 3.25% from a bank when the expected inflation rate is 3%.  If the actual inflation rate turns out to be 4%, who benefits fro the unexpected inflation?  Mr. Brown, the bank, neither, or both?  Explain.  (5 pts)
11. Using Okun’s law, fill in the four pieces of missing data in the table below.  The data are hypothetical. (20 pts)

Year	Real GDP	Potential GDP	Natural unemployment rate (%)	Actual unemployment rate (%)
2001	7840	8000	(a)	6
2002	8100	(b)	5	5
2003	(c)	8200	4.5	4
2004	8415	8250	5	(d)

1. Natural unemployment rate for 2001 (5 pts)
2. Potential GDP for 2002 (5 pts)
3. Real GDP for 2003 (5 pts)
4. Actual unemployment rate for 2004 (5 pts)
12. Data on a before-tax income, taxes, paid, and consumption spending for the Simpson family in various years is given below.  (30 pts)

Before-tax income ($)	Taxes paid ($)	Consumption spending ($)
25,000	3,000	20,000
27,000	3,500	21,350
28,000	3,700	22,070
30,000	4,000	23,600

1. Graph the Simpsons’ consumption function (C vs. DI) (5 pts)
2. Find their households marginal propensity to consume.  (10 pts)
3. Find their households marginal propensity to save. (5 pts)
4. Homer Simpson wins a lottery prize.  As a result, the Simpson family increases its consumption by $1000 at each level of after-tax income. (“Income does not include the prize money) (10 pts).

                                                               i.      How does this change affect the graph of their consumption function? (5 pts)

                                                             ii.      How does it affect their marginal propensity to consume?  (5 pts)

5. What is the equilibrium outcome in this game?  From the students’ perspective, is it the best outcome?  (10 pts)

BONUS Question

14. Explain in four to six sentences why a military arms race is an example of a prisoner’s dilemma.  (5 pts)

Economics Midterm 4 (100 points) – December 16, 2011

15. For each of the following, use an AD-AS diagram to show and explain the short-term effects on GDP and the price level.  (42 pts, or 7 pts each)
1. An increase in consumer confidence that leads to higher consumption spending.
2. A reduction in taxes
3. A decline in planned investment spending by businesses.
4. A sharp drop in oil prices.
5. A war that raises government purchases.
6. A sharp decrease in net exports.
16. Aggregate Expenditures Model (32 pts)
1. What are the four components of the Aggregate Expenditures Model which add up to equal real GDP?  (8 pts)
2. Suppose that a certain country with a private, closed economy has an MPC of 0.99 and a real GDP of $100 Billion.  If its investment spending decreases by $1 billion, what will be its new level of real GDP?  (8 pts)
3. What is a recessionary gap?  What is the impact on unemployment of a recessionary gap, and of GDP growth?  Does it produce a negative or positive GDP gap?  (8 pts)
4. How is a recessionary gap different from an inflationary gap?  Does an inflationary gap produce a negative or positive GDP gap?  What is the impact of an inflationary gap on unemployment and price level?  (8 pts)
17. Discuss your research project, and give a brief overview of your January presentation proposal.  (26 pts)
1. What country have you chosen to study?  Why? (6 pts)
2. What makes your country’s economy different from your classmates?  (10 pts)
3. Overall, what are the strengths and weaknesses of your country’s growth potential?  (10 pts)