Can be the duality theorem applied to not locally non-satiated utility functions? I have the following not locally non-satiated utility function:

$$U(x,y)=-(x-1)^2-(y-2)^2$$

where $U(x,y): \, \!R^n_+ \rightarrow \!R $

The 3D plot of this function is an infinite paraboloid; therefore, $U(x,y)$ can be considered as a not locally non-satiated utility function.

After I've found the Marshallian demand and the indirect utility functions, I'd like to determine the Hicksian demand curve and the expenditure functions using the duality theorem. Can be the duality theorem applied to this type of not locally non-satiated utility functions?

This system doesn´t have solution, because the consumer want to maximize their utility, so there is not a possible solution because is better consume x=0 that any other bundle


Free market vs high income While answering this question I was doing some research and found that

the high-income world has Free Markets.

Is it that because they are high-income, they have free markets, Or, is it that their free market made them high-income?

A supplementary question is: if the latter is true, why don't all low-income countries adopt Free Markets?

Capitalism works best when there is elasticity- the price can go up or down by a marginal unit without running into the problem of plateauing supply or demand.

In extremely wealthy or extremely poor places, the market can experience inelasticity- where a change in the price will not affect demand.

Cheap item inelasticity:
E.g. The water is free at restaurants but we don't see people drinking insane quantities of water, though supply/$0 should equal infinite demand.

Expensive item inelasticity:
Someone is stranded in the desert and has no water. A vending machine offers him water for 100 gold coins. Even though the price is very high, the man still needs water. To save his life, the man would pay 100 or even 200 coins, doubling the price without reducing the demand. As it happens, the man has only one coin and dies because the vending machine was unable to adjust its price to make a sale.

Cheap item inelasticity is rarely a problem because if a country is stuck with undesirable surplus, it could just burn it or throw it in the sea.

Expensive item inelasticity is more prevalent in poorer places where more of the population is unable to afford important goods. A country could A) allow its people to starve B) subsidize goods for the poor C) set a maximum price for the item.

B and C are not free-market options.

A poorer economy is more likely to run into the problem of Expensive Item Inelasticity and is thus more likely to attempt to resolve it.

Is it that because they are high-income, they have free markets, Or,
  is it that their free market made them high-income?

Free market leads to or significantly contributes to a nation's high income.

  why don't all low-income countries adopt Free Markets?

Free markets are not a sufficient condition for prosperity. Many low-income countries with a supposedly market-economy remain undeveloped because rampant corruption in those countries outpaces or absorbs the benefits that free markets bring to the economy.

Elsewhere, ignorance and political interests are the main impediments to the adoption of a market economy. The notion of so-called welfare state is utilized to dissimulate or justify the mechanism or structures with which certain types of reactionary groups retain power.

In socialist (or de-facto socialist) countries, sectors like labor unions retain much of their influence notwithstanding the gaps in their leaders' economics background. A market economy typically results in a loss of concessions those groups are not willing to give up.


Interrelationship between inflation and foreign capital flow For the below let's assume domestic currency is ₹ and foreign capital is in \$

Foreign Capital Inflow => ₹ Appreciates (Because of more \$)

But consider this,

Foreign Capital Inflow => More ₹ in circulation (Since \$ have to be exchanged into ₹ before actually using in India) => More Inflation => ₹  Depreciation

What is wrong in this second reasoning?

I think the flaw in your reasoning is expecting that foreign capital inflow would lead to more ₹ in circulation.  When investors bring in capital, they are buying ₹ that were previously in circulation.  This additional demand without additional supply is exactly what drives the price of the ₹ up.  There is no increase in the quantity of ₹ circulating unless the government/central bank responds in some way.

Bro, more inflation is a domestic phenomenon,when u said more inflation means indian currency has relatively declined in its value in domestic market,lesser no. Of domestic goods can be purchased domestically but if exchange rate is not changing this inflation has no affect internationally Depreciation is a international phenomenon,comparing two currencies.


What's the Cause of Mexico's Poverty Rate? According to various sources (source listed in parentheses):

Mexico's unemployment rate is 3.3% (Trading Economics)
Mexico's literacy rate is 94.5% (Statistica)
Mexico's upper secondary graduation rate is 49% (OECD estimate)

Yet, when I look at the poverty rate for Mexico, the poverty rate is 46.2%, according to Reuters.  Mexico has low unemployment and a high rate of education, yet almost half of its population is in poverty.  What's the cause of this?

High poverty rates are generally a result of two factors

A) Low per capita income (GDP / capita)

B) High inequality (frequently measured as the Gini coefficient)

There are multiple potential reasons for any country's income level and degree of inequality (not just for Mexico's). Moreover, one can decompose your question into two.

1) What makes some countries (in general) richer than others?

2) Is Mexico poorer because of some Mexico-specific factors?

The answer to the first question is kind of the Holy Grail of empirical economics, and if any single economist had been able to answer that he would have definitely won a Nobel prize. The consensus view is that there are different factors contributing to cross-country differences in income. Literacy and education, which you mentioned (and which fit into the economists' definition of Human Capital) are mostly likely a key factor. However, another one which appears to be particularly important to Mexico's case is the quality of a country's economic and political institutions. See below a highly recommended reading from an economist who's likely to win a Nobel for growth theory, which in his very readable book frequently uses Mexico as a case-in-point for his theory.

http://whynationsfail.com/blog/2013/10/29/what-are-institutions.html

It is common that very poor countries also have very low unemployment rates.

A typical reason for this is that a large share of the population can always engage in subsistence agriculture, in which case they are both employed and also poor. However, despite the presence of near-subsistence agriculture in some regions, Mexico is a middle income country and not a "very poor" country, so without looking deeply into the data I would not assume this to explain even close to all of the observation.

It could also be related to a) how poverty is defined and the effects that income inequality can have in the context of the specific definition (e.g., a large share of the population earning less than 1/2 of mean or median income, but still able to access basic housing, nutrition, communications, education and health services), b) the minimum wage, for example if it is very low you might have a lot of people working but at a very low wage (consider this in an ideologically neutral sense, since even if literate this does not necessarily imply that skills matching in the labour market can "handle" a higher minimum wage), c) whether a national poverty rate is applied to areas where housing expectations are met at a much lower cost compared to the capital city (or any other major cost differentials that are not adjusted for due to using a national poverty line instead of adjusting for regional cost variations), ...

Also, consider that the stats are usually for market income, without imputing the value of public services such as health and education. This is among some variety of reasons to prefer consumption indicators of wellbeing instead of market income, despite the shortcoming that there is always some subjective element in the evaluation.


Unconstrained Optimization:Why is there no "profit style" function in consumer theory? When being exposed to your equations for profit maximization you have an equation of:

$$\pi=pf(x)-c(x)$$

with this you can solve for the optimal input(s) $x$ from the first order conditions and some basic algebra.

I was wondering why in consumer theory we don't solve for the bundle that maximizes consumer surplus using a similar type of formula.

The motive behind this question is that if such a formula exists it would simplify the calculations for utility maximization in consumer theory. The profit function is convenient because it incorporates the constraint, however we can't seem to do this in consumer theory.

Why does such a function not exist?

Edit: I'm interested in understanding why we don't have a function which circumvents the use of the Lagrangian in consumer theory. I.e. Why don't we solve to maximize consumer surplus

The "profit" function for consumer choice does exist; it is the Lagrangean:
\begin{equation}
\mathcal L(x;\lambda)=u(x)+\lambda[c-g(x)]\,,
\end{equation}
where utility $u(x)$ is to be maximized subject to budget constraint $c\ge g(x)$.

Note that $\max_x \mathcal L(x;\lambda)$ is an unconstrained optimization problem just like $\max_x\pi(x)$.

Upon reviewing my copy of Microeconomic Analysis I found that he mentions an unconstrained optimization problem (more specifically a formula with the constraint included)faced by the consumer in the context of welfare analysis.

  ... Let $CS(x)=u(x)-px$ be the consumer's surplus associated with a given level  of output; this measure the difference between the "total benefits" from the consumption of the x-good and the expenditure on x-good. Similarly let $PS(x)=px-c(x)$ be the profits or producer surplus eared by the representative firm.
    Then the maximization of total surplus intails:
  $$\max_x  \ CS(x)+PS(x)=[u(x)-px]+[px-c(x)]$$
  or
  $$\max_x \ u(x)-c(x)$$

based on this excerpt, I think its safe to say the consumers "profit function" is consumer surplus maximization problem as defined by:

$$\max_x \ CS(x)=u(x)-px$$


Why do banks loan at APR < 6%, when they can invest that principal in ETFs? I screenshot the picture beneath from HSBC HK's website. Scroll down a quarter of the way, and click on 'Rates' to download that PDF. I ask just about loans under my green horizontal line.

Canadian ETFs with MERs < 0.15% like  XUS (iShares Core S&P 500 Index ETF) can probably outstrip an APR of 6%.

Thus why would a wealthy bank loan at APRs < 6%?
Conversely, why don't they charge more than 6%? Why not charge the opportunity cost of loaning, that is, the APR gained from investing in a relatively safe ETF like XSP?

Furthermore, HSBC probably has PhDs in math like James Simons who can invest in alternative investments that can yield a higher rate of return for the same risk.

XSP is riskier than the preferential rate personal loan. The Standard and Poors 500 is a large composite of U.S. equities, hedged (short USD, long CAD). XSP combines the equity market volatility and the USD / CAD volatility but it tries to offset currency value change by holding a hedge. Some of the volatility is offsetting; some is additive. The equity composite risk is acceptable for many investors if they intend a long investment period, for example, 30 years. The USD / CAD risk is acceptable for some investors if both the Federal Reserve and the Bank of Canada manage to achieve roughly equal inflation rates over the long investment period, but XSP's manager aims to minimize this risk. For many investors, the risk of XSP is only acceptable if a long investment period is intended. However, the preferential rate personal loan is likely for a shorter period. Over that shorter period XSP is expected to be riskier than the personal loan. The preferential rate personal loan is made after checking employment history, income, assets, and other indications of ability to meet obligations. A bank's business model is to own loans; not huge amounts of an equity index. Bank regulators force banks to keep risk below a certain level.

Incidentally...

If XSP is held in the investor's taxable account, keep in mind that the XSP manager sometimes returns capital to the investor which lowers the investor's average cost. The XSP manager sometimes reinvests cash into more equity which effectively means it raises the investor's average cost. Unless you plan to invest extremely large amounts, you might find keeping track of these things to be not worth the effort.

Addendum:

There was a request for information about XUS. You avoid the "currency hedging risk" inherent in XSP by choosing XUS instead. Currency hedging risk is the risk that the fund manager's hedging activity imperfectly eliminates your exposure to the USD which is inherent in the underlying asset which is based on the S&P 500. By choosing XUS instead, you are accepting "currency risk". That is the risk created by exposure to the USD which is inherent in the underlying asset which is based on the S&P 500.

In this risk chart they show that XSP has both kinds of risks, because the hedging is imperfect so XSP still has currency risk. By implementing hedges, the manager aims to make that currency risk less than what is in XUS.

It's more complex than that
Banks loan in different interest rates to different customers based on their cost of capital and loaner risk.
They earn the difference between their cost of capital and interests paid.

The do not hold a dollar in deposits for each dollar loaned, but far less (depends on regulations, or internal policy. Bazel 2 recommendations talk about that). So the return on loans can and should be higher than any external device, in relation to the risks.

Banks do manage their cost of capital in financial divisions in charge preciely on that, including profitable trades on the banks money. These accounts are called "nostro"

In a broader sense any company can invest in capital markets instead of going about its business, as capital market derive from business activities and not the other way around, logic says its not a sustainable model. Yes, stock buybacks in exchange for company leverage is a bubble inflator and not something sustainable...


Why does every electronic transaction of USD legally take place on American territory? In an article of a respected German newspaper (Die Zeit) I found the following statement (translation by me):

  90 % of all foreign exchange trades are dealt in USD. Since every electronic transaction of USD legally takes place on American territory, the US authorities can almost always take legal action against the involved individuals and companies, even if they are not located in the US.

I´ve tried a Google search, but did not find an explanation, so I thought I´d ask here (also, I´m quite new to economics).

Are really 90 % of all foreign exchange trades dealt in USD?
Why does every electronic transaction of USD legally take place on American territory? What laws/processes are responsible? What about non-electronic transactions in USD?

I´d be interested in an explanation or suggestions for further research!

Are really 90 % of all foreign exchange trades dealt in USD?

The actual rate for the most recent year(2016) we have data is 88%.  This comes from the Bank for International Settlements.

  Why does every electronic transaction of USD legally take place on American territory? What laws/processes are responsible?

This isn't true.  The US handles about 20% of all FX trades and the UK about 40%, most of which are dollar trades.  However, it is probably the case that most trades in dollars could be considered regulated by the United States.  This is a practical result of several sets of laws and not one specific law.

For example, the US asserts jurisdiction over the entire world for its citizens.  If an American engages in some action that is legal in the country they are standing in, but not legal in the United States, then it is a crime in the US.  If they commit a crime in another country it can also be enforced in the United States.  For corporations, if they do any business in or with the United States then the United States acquires legal and regulatory jurisdiction.  Since the banks which trade foreign currency generally have offices in the United States, they are subject to US jurisdiction.

Additionally, while there are several wire and exchange firms, they end up being required to follow US law and to interact with the Federal Reserve System if they have any nexus with America.  As such anything that is fraudulent, that uses any form of wire, becomes liable under US wire fraud laws.

The statement isn't probably literally true, but since people don't have any physical control over which networks the institutions use, it is safe to assume the US has jurisdiction over the transaction along with any other countries that are directly or incidentally involved.

  What about non-electronic transactions in USD?

Non-electronic transactions in paper USD do not create US jurisdiction unless one of the parties has a tie to the United States.  All American fall under US jurisdiction at all times, everywhere.  The only paper transactions which would have automatic US involvement would be in counterfeiting.  If a Bolivian and an Argentian are standing in London and one buys a hamburger from another for a paper dollar, the US has no standing if a crime were committed.

Because that's the law as written.

It's related to the ability of the US to disallow international financial institutions to interact with the US market unless they play by the rules of the US market.

This extends way beyond the question of transacting in USD, and includes many requirements such as ability to flag transactions of types that may be involved in money laundering, terrorism financing, etc.


What's the opposite of a Pareto improvement called? Wikipedia defines a Pareto Improvement, "given a certain initial allocation of goods among a set of individuals" as:

  a change to a different allocation that makes at least one individual or preference criterion better off without making any other individual or preference criterion worse off

Given this definition, then, the opposite of a Pareto Improvement should be:

  a change to a different allocation that makes at least one individual or preference criterion worse off without making any other individual or preference criterion better off.

What's the correct way to refer to this? Does it have a name?

I usually use the phrase "Pareto worsening". It is not really widespread, in fact I am not sure I have ever heard anyone else use it. However now I googled it and people seem to use it in connection with Hart's 1975 paper wherein he shows that the opening of some new markets can make every agent worse off. Hart himself did not call this Pareto worsening, but other scholars do. An example is on page 230 of volume II of General Equilibrium, Growth, and Trade. Here is the same phrase used in Information and Securities: A Note on Pareto Dominance and the Second Best.

The negation would be "there does not exist at least one person that is better off, or, there exists someone that is worse off."  That is the improper use of police power.  Indeed, this could be a stylized definition of racism if you defined racism as the theft of life or property from one group to another based on the color of their skin or other social classification.  The opposite of Pareto optimization would be something like institutionalized racism.

A person commented it did not answer the question. That isn't true, but I will expand on the discussion.

The negation of the definition of Pareto optimality is above.  Either a reallocation has happened but no one is better off, or at least one person is worse off.

For the former to happen, there would have to be a use of police power.  If everyone is indifferent then there is no reason for reallocation to happen.  Although no one cares, it isn't rational for changes to happen as it is an equilibrium.

An example of this is where a bunch of people are sitting around a table and no one cares where they sit.  The only way reallocation of chairs will happen is if someone with power says "okay, everyone shift right one chair, for no reason, just because I have the power to do make everyone do it."

The second case has at least one person worse off.  No one would rationally make themselves worse off.  That also requires police power.

The problem is that English lacks a good term for theft of goods through police power except in the case of racism.

Note that the definition of racism is not bigotry or prejudice.  Bigotry is the strong personal aversion by a person against a group, possibly racial or ethnic but it could be on other dimensions such as religion or politics.  Neurological studies of bigotry show that it processes in the area of emotion connected to smell, disgust and emotion and links the group to danger to food.  That is bigotry.

Prejudice is simply the fast judgment of a person by observable characteristics and may not be related to race.

Racism is the theft of property or life from one group to another through the use of police power, whether formal as in Title One of the Housing Act of 1947 also known as the Negro Removal Act or informal as when the Klan was permitted to kill or seize property without governmental recourse by the victims.  It is the use of police power through acquiesence.

The only requirement of the negation of the Pareto principle is indifference OR at least one person loses.

That could also describe crime as it says nothing about at least one person being worse off.

I don't agree with your negation.  It does not follow from de Morgan's laws.

Finally, it could happen due to taxation and reallocation.  Those would not be crimes either, moral or otherwise, but we lack a term for it.  Libertarians view it as theft for this reason.  Most people consider it morally neutral because there if there is no intent to specifically do harm to any group for the benefit of others.

I should point out that we usually lack words for things other than optimums and points of inflection.  If you look at $y=-x^2$ there is an extreme value and we call it a maximum.  We do not have a name for the other uncountably many points.

EDIT
Based on your comment, where someone is worse off and no one is better off is called waste.  However, for the reallocation to happen on purpose it would mandate irrationality to happen.  I do not mean irrationality as a psychologist would mean it.  For example, a schizophrenic may have psychotic preferences but they still act rationally on those preferences.

Let me give you an example. Let us assume that I hate you and you have apples that have rotted.  You do not care because you can turn them into applesauce and you are indifferent between fresh apples and applesauce.  I, on the other hand, hate applesauce.

I offer to trade your rotten apples, which you are indifferent for, for my good apple making me worse off.  Although I am indifferent to trade a good apple for a good apple, I am not indifferent to getting a rotten apple.

So I would be acting in an individually irrational manner.  There is no word for this but the term of art would be to act in an irrational manner.


How can governments seemingly run permanent budget deficits? How can countries afford to run budget deficits for decades on end and not become overburdened by interest payments on those debts?

Because they have low interest rates and growing tax revenue.

As long as your income is growing faster than your debt, you can keep borrowing.

Simple : inflation.

The model of create deficit budget to enact infrastructure to increase production that lead to higher tax collection to offset the deficit doesn't hold.

Because there is no guarantee of return (no mater how long the term are). There is government that enacting infrastructure/spending on the wrong place. Corruption, grafting are norm in all government institution.

By slowly supply more money into the system, it will dilute the value of interest served.  And this the reason of why some country bonds are deems "junks", due to the inflation factor.

If the production able to absorb the additional money(where people buy goods and services instead of hoarding it), then you will not see goods price increase.

"Income growth" are ambiguous term. It is relative to inflation level. Imagine a country print trillions of notes and give them 10,000 to every of them, does this denote "income growth" or worst "GDP growth" ?(also imagine this money are given to cronies)

One of the cheeky but "morally correct" inflation are once play by Japan bureaucrat during the first few year after GHQ occupation (1945-49). Where the government run a huge deficit due to fix payment to thousands of high ranking feudal class family. Since civilian doesn't hold much wealth, bureaucrat purposely create a superinflation.
Let me elaborate how : (all number are not actual historical figures)
Before the super inflation, the bureaucrat need to pay 360 millions yens(say 1 US dollar = 360 yen). After enacting the super inflation, it devalue the money (say 1 US dollar = 360,000 yen). So the 360 mil yens suddenly become the original 1/1000. So the deficit government only need to enact 1/1000, deficit fixed. Since post WW2 Japan doesn't have much cast on hand, they will collect wages according to inflation adjustment, thus they are not affected by the problem at all.

This is a NOT repeatable method. Not unless you countries are raze to a flat land to play such card. Since people in most country today held significant number of cash today. This method will destroy the trust on cash, also it will destroy the foreign trade value of your currency.  During 1945-49, Japan doesn't have much trade with any country.


Mathematical open problems that (when answered) might unlock MAJOR mathematical (micro)economics/finance/econometrics discoveries Are there any (specific) math open problems that mathematical (micro)economics / finance / econometrics researchers wish mathematicians could solve for their discoveries to flourish? If positive, which math open problems are related to which applied topics and how they are related?

When I ask that, it really comes to my mind the case of stochastic analysis and option asset pricing problems in mathematical finance.

People have argued that if $P \neq NP$ then efficient markets are impossible and certain equalibria may not exist. However, they may hold approximately, so I'm not sure if this qualifies. Additionally, if it turns out that $P=NP$ then certain economic optimization problems (e.g. in logistics) become easily solvable. On the other hand, if $P \neq NP$ then it might imply that encryption is very safe and therefore certain forms of economic arrangements will still be possible in the face of technological advance.

Maybe it would be needed first of all to get ride of this:
http://www.paecon.net/PAEReview/issue63/Barzilai63.pdf
He claims to have demonstrated that any calculus on a utility space, wether they cardinal, ordinal or expected, is logically inconsistent, mathematically impossible:

  Abstract
  By formally defining the relevant mathematical spaces and models we show that the operations of addition and multiplication, and the concepts that depend on these operations, are not applicable on ordinal, cardinal, and expected utility. Furthermore, expected utility’s scale construction rule is self-contradictory.


Why does the stock price of listed firm matter for that firm? As the title hints, why would the stock price matter for a firm?

Which are -in rough terms- the channels that a firm's stock price influence it?

There are multiple channels :

Debt: the cost of debt may raise significantly if the value of equity drops. Indeed, the lower the equity, the higher the risk of the debt, as the firm will have a higher gearing ratio (also called leverage). Thus, the firm might have difficulties to gain access to additional debt or face a higher cost.
Financing: A firm with a poor performance on stock markets might face difficulties to raise additional capital. Investors might indeed not be willing to buy the firm's stock if its performance is poor. Therefore the firm might not be able to raise additional capital.
Reputation: a decrease in stock price can negatively affect the reputation of a firm. Not necessarily with the customers but also with other stakeholders, such as the suppliers which could fear that the financial stability of the firm is not assured.

So overall I would say that the stock price is mainly important to the firm as it is a strong determinant of the costs it will face when raising capital or debt.

Also, note that stockholders are owners of the firm. As such, they can compel the firm to adopt a more profitable strategy, if they so wish. Of course, it might be hard, but activist investors for example show that it is possible.

It does not matter to the internal operations of the company.

The exceptions would be financial channels.  For example, if the the company is actively buying, selling stock, or planning on buying/selling stock it is a big deal.

It is a very big deal for mergers and acquisitions of course...even if the buyers as stocks are frequently used to buy other companies.

It is also a very political statement.  If a company is wanting to borrow or refinance debt, a strong stock price can influence their credit rating favorably.  But rally the biggest reason is board politics.  A stock price tends to correctly with shareholders feelings for a company.  If low enough, there is a possibility that the board of directors and/or executives will be fired.


How much would it take to end global extreme poverty? E.g., according to this page, Jeffrey Sachs estimated that it would take $175bn/year for 20 years to do so.

What are some other estimates?

The Economist (Oct 8th, 2016, online, PDF) attempts to answer this question.

It defines the global poverty gap as the amount we'd have to transfer to the world's extreme poor (defined as those living below $\$1.90$ a day, at 2011 PPP), in order to lift them to the $\$1.90$ a day threshold.

The evolution of this global poverty gap from 1990-2013 is graphed below. As should be evident, at the current rate of decline in global extreme poverty, the world is on track to hit the World Bank's goal of completely eliminating extreme poverty by 2030.

Nonetheless, even if there were no further progress and global extreme poverty stayed frozen at 2013 levels,

a transfer of US\$78b a year would suffice to completely eliminate extreme poverty.

The Economist adds an important caveat:

  In reality, of course, money cannot be directed so precisely
  to the poor, nor transferred cost-free. In some countries, the infusion
  of money might also push up prices and currencies, making
  the endeavour more expensive. Nonetheless, this thought experiment
  illuminates the diminishing size of the problem. The world
  can afford to end poverty. Indeed, it might end poverty before it
  figures out how to measure it accurately.

$$$$

P.S. Note though that the reduction in global extreme poverty has been largely due not to transfers or aid of the sort envisioned by Jeffrey Sachs, but to economic progress, most notably in China.

No amount of money can save the poor people from having to pay for overpriced  commodities. Give 100 billions of $US to each poor person today and the next day their corrupt politicians will increase the prices of the food a billion times (with the help of their family-business monopolies), driving the majority poor again.
The poor countries lack real free markets and then only competition regulators and anti-corruption policies and practices can solve that problem. Speculation of prices drives the people poor and even into starvation. link1 - link2 - link3

No amount of money can save the poor workers from being paid miserable wages. But government regulations can (by implementing decent minimum wages).
The unemployed can be lifted out of poverty once the governments start to collect taxes properly and give a proper unemployment help to the unemployed. If the charities will give a large but limited amount of money to those unemployed they can only lift them out of poverty for a finite amount of time - until they (the unemployed) spend all that money - and after that they are back into poverty.
If a poor country has unsustainable level of unemployment, then the government can make a land reform (like for example in Taiwan, 1950's), and then rent land (for very cheap) to those unemployed who desire to become farmers. The land gives them a job, so there you have them - jobs. No amount of money can do that. Give a lot of money to the poor today and tomorrow the price of land will explode, staying out of the reach for the many. So the money can't solve the poverty problem, but the government's actions can.

Also keep in mind that the way poverty is measured can be quite deceiving. A farmer with a full stomach who sells products for less than one dollar a day is considered to live in extreme poverty. But if the same person leaves the farm and works in the city for a corporation for five dollars a day and starves (no money left after paying rent, water and electricity) then he is considered to be lifted from poverty and on moving steadily on their way to a prosperous life - by the the economists certified by the top-level universities and working for top-level corporations. Heard about "Africa raising?" - e.g. Ethiopia.
As a result, while the UN bodies provide triumphant news that extreme poverty is decreasing, the inequality is actually increasing - link2 - link3

The bottom line is: instead of throwing with money to the poor and watching them being sucked up quickly by their corrupt politicians, we should better pressure those corrupt governments in order to implement real competition, free markets and to reduce corruption. Freezing the assets of those corrupt politicians (e.g. real estate properties in London and Monaco and bank accounts in Switzerland) might be a very good start for pressuring them - this is my own opinion but it is supported by the reality of the recent EU and US freeze of Russian elite assets. link1 - link2

Economists and political scientists appear to be converging to the view that the quality of institutions is the critical factor for countries to develop successfully, and to make effective use of natural resources. (Anand Rajaram, World Bank, 2013)

So the key for lifting the poor from misery stands in increasing the quality of institutions, not in throwing money at corrupt governments. And the quality of institutions is inversely proportional with corruption.

Not only does corruption affect economic development in terms of economic efficiency and growth, it also affects equitable distribution of resources across the population, increasing income inequalities, undermining the effectiveness of social welfare programmes and ultimately resulting in lower levels of human development. This, in turn, may undermine long-term sustainable development, economic growth and equality. (Marie Chêne, Transparency International, 2014)


How did the Plaza Accord revalue the Japanese Yen? In September 1985, Japan, the US, and three other nations agreed to the "Plaza Accord," which appreciated the Yen and Deutsche Mark. The value of the Japanese Yen appreciated from 200 Yen per Dollar to 100 Yen per Dollar.

How was this implemented? What of the free market? Did interest rates in Japan double? What are the mechanics by which an external intervention like this is made to hold in the "free" market (especially the FX market which is renowned for being so liquid and so "free").

Thanks

The Plaza Accord was implemented through market mechanisms. According to Wikipedia Central banks of the signatory nations spent $10 billion dollars. They exchanged these dollars for other currencies. This increases the supply of dollars and may even decrease demand if so far the central banks have been purchasing dollars. Due to the higher supply and not higher demand the 'price' or exchange rate of the dollar fell. At the same time the countries also implemented policy changes. This would effect the mid to long term exchange rates.

The Japanese interest rate did indeed fall.
http://www.tradingeconomics.com/japan/interest-rate
 Mind though that the US interest rate also fell
http://www.tradingeconomics.com/united-states/interest-rate

Let JGOV mean the Japanese Government.  I base my answer on my B.A. in Economics and  this Reddit post.
TL DR
With the Plaza Accord, the US forced Japan to fix the trade deficit by rapidly appreciating the Yen that hurt Japanese exports. The Bank of Japan tried to compensate by lowering interest rates to near 0% which didn't boost consumption/investment, but instead lead to speculative borrowing and huge bubble.
Long answer
The issue wasn't just the Plaza Accord. The main thing that ultimately caused the lost decades was a combination of the Plaza Accord, the JGOV's incompetent mindset (thinking that we can do no wrong), the ill-fashioned stimulus plan and a combination of other factors.
Blunder 1 of 3
The first thing that happened was the Plaza Accord. The US was getting worried about potential Japanese power supplanting American hegemony just like China is today, and just like today there were articles ALL over the news about the Japanese "stealing US jobs" and "trade-cheating" (quite odd how similar that is to today!). The Japanese kept stalling and stalling trying to bide for time by painting (quite successfully actually because of Japan's reputation of being a democracy) the American politicians and policymakers of being racist and anti-Japan. While Japanese's scheme worked for a while, the fundamental game of geopolitics prevailed and the US used its political capital to force the Plaza Accord on the Japanese.
This appreciated the Yen. Normally for an export-driven economy, you want your currency undervalued because that cheapens your exports. Japan's appreciated Yen made it to lose exports and this loss caused panic. Exports were going to drop and aggregate demand was going to collapse.
The most important thing is that the Japanese economy was already well developed. Japan couldn't invest more into infrastructure because of the law of diminishing returns (where investing more leads to less and less marginal returns). In fact Japan caught up in terms of productivity to the West in the 80's. This meant that stimulus was a terrible choice! The JGOV  should've simply manned up and faced the recession. Instead, the JGOV decided to lower interest rates (therefore boosting investment) and invest in infrastructure (boosting government spending). This led to credit and investment money flowing into speculative bubbles across the economy, which tied up a lot of companies' assets. When they burst, they burst the huge exposures they had led to a ripple effect which led to...
Blunder 2 of 3
...the second major policy error! Instead of rolling back stimulus and investment after the bubble burst, the JGOV kept pumping money into the economy to keep a prolonged dip in employment from occurring, because the JGOV continued to lend to insolvent companies, and to restructure the huge debt into government debt. The ripple effects from these two major policy blunders led to the Japan's lost decades.
Blunder 3 of 3. Japan's very strong, homogenic "group" culture which leads to more blunders.
The notion of "sticking together" and "helping each other out" is very strong. The 2012 earthquake instantiated this, where people weren't looting but were calm and supportive throughout the entire country. Another factor the Japanese work culture of "life in a company", where a worker joins a company directly after study or training and stays with this company for their entire life. Both factors make it difficult for politicians to face up to the problem and end several of these lifelong "bonds", by letting several companies go bankrupt and therefore a wave of people get unemployed.
Because of the group culture, direct criticism is a no-go in Japan. Simply speaking, there isn't a culture of harsh criticism and social protest (this changed a bit recently but not very much). Thus the Japanese political parties don't have to face backlash for bad politics, as few are interested in the work of politics.


How do central banks earn profit? I thought of Central banks as the regulators of financial markets. But surplus reserves of some Central banks surpass giant corporate companies.

Please explain me how do they manage to make profit in just regulating activity and printing currency.

Central Banks are not made to make profit. They are there to stabilize the price (inflation) and avoid crisis.

But to do that, they sell and buy assets. If they do a good job, they must purchase assets when they are undervalued and sell when they are overvalued. By doing that they are making profit.

This is good because Central Bank's infrastructure does have a cost. If they were not making profit, they would have to be financed by the taxpayer. When a central bank is making profit, they typically give this money back to the state, lowering the amount of needed taxes.

A central bank makes a profit for the fact that it makes money out of thin air. A hundred dollar bill costs them less  then fourteen cents to print. They use a simple model of supply and demand. When there is a high need for money small amounts will be circulated, and when the need is small the market gets flooded with the stuff. Fractional lending is another system they use. It works like this. For every hundred dollar bill they consolidate into a loan to a merchant for example. Another 10 hundred dollar bills are printed and loaned out. A big part of a central banks infrastructure in 2019 and beyond is Digital money. In other words their moving into a monetary system that will look a lot like the Apple Pay system. Where you just swipe a computer key to conduct huge transactions with Chase for example instead of delivering the stacks of paper money. Good question keep them coming.


What are the advantages and disadvantages of the IS LM model? How does the IS-LM model help economists in the day to day analysis of the economy? There are just too many assumptions that are not there in the real world.

The best economic models make useful predictions with as little complexity as possible -- in other words, they make assumptions that aren't "true" in the real world, but make predictions that nevertheless turn out to be true.

For instance, advocates of the day-to-day use of the IS-LM model such as Paul Krugman point to the analysis of liquidity traps as an important case where its users have proved to be right where many other analysts have made bad predictions.

From "What I Mean When I Talk About IS-LM (Wonkish)":

  Those of us who understood IS-LM and took it seriously declared in advance — in late 2008 and early 2009 — that big deficits and huge increases in the monetary base would lead neither to soaring interest rates nor to soaring inflation. This was very much not what many influential people were saying: there were widespread forecasts of soaring rates and soaring inflation. Later, there were many people denying that austerity would have negative effects on output.

He provides a more detailed explanation of an IS-LM analysis of liquidity traps (and a few other insights that the model provides).

Advantages:

Large enconomy
National level problems
Calculate national income
Less assumptions
Working of economic market

Disadvantages:

Ignorance of individual units
Incomplete records
Less exact results
No individual approach


Is product opportunity frontier the same as PPF? In CFA level 1 reading 14, they have this term called Production Opportunity frontier and it is defined as

Curve describing the maximum number of units of one good a company can produce, for any given number of the other good that it chooses to manufacture.

The graph is a straight line

Is it the same thing as what is commonly known Production Possibility Frontier with the curved line?

Yes. The "curved line" clearly fits your definition as well. The PPF is curved if (but not only if) there are diminishing returns to inputs such as labor and capital. See also
https://en.wikipedia.org/wiki/Production%E2%80%93possibility_frontier

No they are not same. Production Possibility Frontier is the maximum amount of output that can be produced using different combination of inputs. However this opportunity frontier is the tradeoff between different outputs that a firm can produce. In order to increase production of one output it has to decrease production of another.


Whats the name of the famous hostile takeover where the winner payed less than the loser In my studies I learned about a bid war ending in a hostile takeover where the winner ended up paying less than the loser offered. It is a very nice demonstration of elements of game theory so I would like to reread that again and to recommend it to a friend.
Unfortunately, I cannot find it in the internet regardless of what search terms I try. I will state the details I remember. I would be very glad if the answer could tell which companies were included so I can research the interesting details.
Here we go:

Two companies, A and B, competed about to acquire a third one.
The bid war happened at least 10 years ago, maybe more.
The bid war ended in a hostile takeover.
Company A offered a fixed amount. I am not sure, but that offer might have been valid only if enough shareholders accepted it.
Company B offered a higher amount regardless of enough shareholders accepting it. However, if a certain number of shares were reached, the offered price was reduced linearly.
B's offer was dominating A's offer. B won the hostile takeover.
In the end, shareholders received less for their shares than what A offered initially. (This is the crazy thing about this bid war).

I was unable to translate that list in sufficient search terms. Does it ring a bell for someone?

With the help of a former fellow student I was able to find out some details.
The anecdote was about the following three companies:

Macy's, Inc.
Robert Campeau
Federated (covered in the article about Macy's)

Some news coverage exists:

https://mindyourdecisions.com/blog/2011/09/20/when-game-theory-backfires-a-case-study-of-robert-campeaus-takeover-bid/
https://archive.fortune.com/magazines/fortune/fortune_archive/1990/06/18/73686/index.htm

In short, Macy's offered \$67 per share contingent on getting a majority of shares. Campeau offered \$74 per share if less than half was tendered, otherwise $\frac {0.5}{x} * \\\$74 + \frac {x - 0.5}{x} * \\\$60$ with $x$ the fraction of shares offered to Campeau. It seems as if the bidding war continued a bit after this scheme. The prices given in the blog above differ, I am sticking to these from the lecture.
I am very grateful for having had the opportunity to attend Prof. Kirste's lectures at the Universität Rostock. They were full of impressive details like this gem here.

https://en.wikipedia.org/wiki/Pyrrhic_victory
Probably you are looking for this term. Today It describes any situation where a win is achieved at a such a large cost that it is likely that loosing was more profitable.
https://en.wikipedia.org/wiki/Dollar_bill_auction
This is somewhat similar situation in auctions


Could massive derivatives exposures at banks lead to disaster? A while back I posted this question about the possible risks of banks having massive derivatives exposures.

The most upvoted answer (by BKay) said that there was little risk because banks mainly hold pairs of opposite bets. So for example it may simultaneously hold bets with two companies (A and B) where, if the price of oil goes up sharply then it has to pay out to A, but B has to pay the bank.

So this is all fine so long as both A and B are solvent after the oil price rise. Presumably if B goes bust then the bank is still liable to A.

So now my question is - couldn't there be some scenario where there is a sudden economic shock which simultaneously means that the banks will have to do a lot of paying out of bets but where the companies that are losing bets, and owe the banks money, go bust. With such enormous exposures it wouldn't take much of a fraction of the bet-losing companies going bust to cause an enormous loss for the banks.

Its possible, but, in principle, most non-financial companies use derivatives to "hedge risk", rather than to "bet". Hedging risk means that the firm will use derivatives to lower its chances of going bankrupt, for  example an oil company will buy a put option on its oil output, so that if the price of oil falls after the firm invested in producing it,  the firm can still sell the oil at a high price, and avoid bankruptcy. Other times, the bank is an intermediary in futures. futures allow a firm to sell its output forward in time, and another firm to buy the output forward in time. this reduces the risk for both of the firms. Of course, selling or buying  forward reduces the  chance of making  it big if the prices improve in your favor.

Also, financial regulation forces banks to consider multiple possible future scenarios and their effects on their balance sheet. These exercises result in a measure of the riskiness of the bank, and in turn let authorities ask the bank to hold more capital or unwind some of its positions if has too much risk of some sort. The exercises include dramatic swings in commodity prices, unemployment, or the failure of large corporations, or large financial counter-parties.

There are certainly some financial agents out there that hold tons of risk. They might be indeed betting on one view or another, but because of the regulatory environment, these can't be "banks". This is very important, because if they are not banks, then their collapse does not then create contagion. A big investor looses his money, but if its not a deposit taking, (or similarly, a highly leveraged institution), then the losses, or gains, are in sense expected.

Therefore, although you are right in principle when you say that if banks stand in the middle between two firms and one of them goes bankrupt then the bank gets hit, regulation is meant to push banks away from risk. Also, the possible losses to the banks owners move them towards avoiding risk. And "risk" here includes the one that comes from their clients on one leg or another of a deal collapsing...

Here's a more detailed analysis: Congressional Research Service article on Financial Regulation.
You could also do worse than by taking Nobel Prize winner Bob Shiller's  online course.

The real issue remains one of perception, I believe. As long as enough people believe (however wrongly) that the notional numbers are amounts that must change hands, then markets will get spooked by them when other things -- impending regulatory fines, for example -- threaten an institution.


How much average value does 1 working hour produce? ( are there reliable statistics?) This is a non-economist's question.

As a philosophy teacher ( in a french high school) , I have to study the theme of " labour" in class. I'm looking for factual data in order to assess the contemporary validity of some philosophical theories regarding the employee/ enterprise relation.

I suppose there is no single answer to the question : how much average value does 1 working hour produce?

Are there reliable statistics dealing with this subject?

Either statistics by country, or by enterprise, or by social category/profession?

Has also the profit generated by 1 working hour been studied?

Has the historical evolution of this profit through time been investigated?

One possible measure is "GDP (or productivity) per hour worked": OECD, EU28.

Evaluating political economy from the perspective of an hour of labour is notoriously a labour theory of value.

The most well developed labour theory of value is Marxian labour theory of value.

Marxian labour theories of value treat one hour of standard productive labour at the standard skill level as worth one hour of productive labour.  Capital and other inputs are amortised into the results of labour.  Deficient or super effective labour is worth more or less than the standard hour of labour.  (all labour hours must be realised, ie: paid for.  Capitalists who produce speculatively but still pay their labourers, but fail to sell their produce are idiots [Capital, Volumes II and III]).

As there is no other reference point for value in this schema of analysis, one hour of labour is worth one hour of labour, unless your labourer is slow or dumb or fast or skilled.


Inflation without Increase in Money Supply? Is it possible to have inflation without increase in the supply of money?

For example, if workers demanded higher wages, and goods went up in price, but the money supply in circulation did not increase. Or is this an impossible paradox?

It all depends on what you mean by inflation and by money supply. Technical questions and answers need specific definitions, otherwise everyone ends up talking at cross-purposes.

Is it possible to have an increase in general price levels without any changes to the amount of money in circulation? Yes: if the velocity of circulation of money increases, and the amount of goods and services available to buy does not increase by as much.

Is it possible to have an increase in general price levels without any changes to the amount of money in circulation or the velocity of circulation? Yes: if the amount of goods and services available to buy, decreases, so that there's more money chasing fewer goods.

Is it possible to have an increase in general price levels without any changes to the amount of money in circulation or the velocity of circulation, and with no decrease in the amount of goods and services available to buy? Yes, if the demand curve changes so that the same amount of money is now used to buy a smaller quantity of stuff at higher prices.

Is it possible to have an increase in general price levels without any changes to the amount of money in circulation or the velocity of circulation, and with no change in the amount of goods and services bought? No, because the velocity of circulation is by definition total transaction value divided by the amount of money in circulation, so if velocity, quantity and money supply are constant, then prices must be too, because total transaction value equals prices times quantity.

I believe that inflation is only caused by an increase in the money supply due to a dilution of the currency.
All other causes mentioned above tend to be simple short-term market fluctuations that will eventually "smooth out".
We are told that 2% or 3% inflation is a good thing but 3% inflation is basically a 3% tax on all outstanding currency including petro dollars, eurodollars, drug money, dollars in mattresses, and you name it.
The more inflation, the less the government is required to pay when reimbursing T-bills.
The beauty of gold and crypto currency is that they can only be diluted slightly, thus any increase in value is not really an increase in value but a decrease in the value of the dollar.


How does paying off debt to the bank work? So, I understand that banks create money by making loans which end up as deposits. But what I don't get, is how paying off debt works in the big picture. Let me explain.
Let's say Jim got a loan of \$100 from the bank. He now owes the bank \$100 + \$10 interest. Where is he getting the money to pay off the loan? All of the money in the economy is created by the bank. So in this simplified example does he get it from someone else who took out a loan? Multiple people? Let's say he sold apples to Sarah and Bob for \$60 each. He would be able to pay the \$110 he owes to the bank. But Sarah and Bob would have had to take out loans, so they would also be in debt to the bank. Where would they get the money to pay off their debt?
Does the economy depend on a majority of people being unable to pay their debt? But if that was the case, how would the bank make money? I must be missing something here.

The total nominal income of the domestic economy is equal to nominal GDP growth. This chart shows nominal GDP growth for the U.S.: link to FRED graph.
If you dig into the numbers, we see that nominal GDP growth is often higher than most interest rates. So total income is growing faster than interest costs.
You cannot look at one loan in isolation and hope to make sense of total flows of income. At any given time, new loans are continuously made, while old loans are paid down. Mortgages are typically the largest household sector debt in aggregate. New buyers get large mortgages, while existing homeowners slowly pay down debt. The net change is normally positive, which effectively finances construction. Construction in turn adds to GDP and hence incomes. This story is repeated in different forms across all types of debt.

Edited in response to down vote. To answer the question we need to describe a reasonable econometric model that shows what happens when the borrower repays principal and interest to the bank and we need an aggregate model for where these payments "come from" on the whole economy.
This four page paper shows the accounting context with a simplified model for hypothetical bank balance sheet and income statement:
https://www.richmondfed.org/~/media/richmondfedorg/publications/research/economic_brief/2012/pdf/eb_12-03.pdf
where one must recognize that income items listed in the income statement are broadly classified as revenue.
The following reference:
https://www.utm.edu/staff/bputman/put7.htm
Gives this accounting identity:

Assets + Expenses + Dividends = Liabilities + Owners' Equity + Revenue

Assets, Expenses, and Dividends are called debit balance accounts. These increase by a debit and decrease by a credit entry. If total debits have greater value than total credits then the account has a positive (debit) balance.
Liabilities, Equity, and Revenue are called credit balance accounts. These increase by a credit and decrease by a debit entry. If total credits have greater value than total debits then the account has a positive (credit) balance.
Temporary accounts are broadly classified as expenses, dividends, and revenue. When the books open at the beginning of an accounting period temporary accounts are set to zero. When the books close at the end of an accounting period the temporary accounts are reset to zero by an appropriate entry and the net result is a transfer to equity as retained earnings or net loss for the period.
For simplicity we classify bank assets as reserves, securities, and loans; we classify bank liabilities as deposits and other liabilities; and we want to see the sources and sinks of deposits on the balance sheet of a bank or banking sector. We will put the desired level, deposits, on the left side of the equal sign and put the sources and sinks on the right side as follows:

Deposits = Reserves + Securities + Loans + Expenses + Dividends - Other Liabilities - Equity - Revenue

Loans issued and repayment of loan principal for transactions with nonbanks:

$\Delta Deposits = \Delta Loans$

Securities purchased from nonbanks and securities sold to nonbanks:

$\Delta Deposits = \Delta Securities$

Bank expenses or dividend payments made to nonbank units increase deposits:

$\Delta Deposits = \Delta Expenses$

$\Delta Deposits = \Delta Dividends$

When nonbank units pay revenue to banks revenue increases and deposits decrease:

$\Delta Deposits = -\Delta Revenue$

where bank revenue includes items such as interest income, penalty fees, and fees for services. Negative interest rates have the same accounting pattern as fees.
Equity adjustment to close the books at the end of an accounting period:

$\Delta Equity = Revenue - Expenses - Dividends$

where the change in equity is positive, to register retained earnings, when revenue exceeds expenses and dividends for the period; and the change in equity is negative, to register a loss, when expenses and dividends exceed revenue.
Note the sources of Deposits are payments to non-bank customers shown as extending new Loans, purchasing securities, paying Expenses, and paying Dividends, which logically will increase the deposits of those who are paid by the bank or bank sector.
One sink of Deposits is repayment of loan principal by non-bank customers this would reduce Deposits on the left and Loans on the right side of the above identity and is consistent with an accounting based econometric model of how deposit levels are coupled to loan levels.
Another sink of Deposits is Revenue from interest payments or fees of non-bank customers which are recorded as a decrease of deposits and increase of Revenue. So the interest payments on loans decrease deposits, increase revenue, and tend to increase equity when revenue is closed to equity at the end of an accounting period.
Another sink of Deposits is a decrease of Deposits and increase of Other Liabilities. I call this "migration" because it happens exclusively on the liability side of the bank or aggregate bank sector balance sheet.
In an aggregate bank sector the payment of interest and principal has no external source since deposits must be generated and exist in the aggregate system before they can be reduced to repay principal of loans and to pay interest that tends to increase the revenue and equity of the bank or bank sector when it operates at a profit.
An individual bank can lose reserves and deposits due to withdrawal of currency or gain reserves and deposits in equal measure due to "deposit" of currency. However the banking sector as a whole tends to lose reserves and deposits due to the currency drain. The central bank would purchase securities from the non-bank sector to add reserves and deposits back to the aggregate bank sector to offset the currency drain. The central bank can provide reserve loans to banks which increase reserves and borrowing from the central bank under Other Liabilities.
The only central bank operation which increases deposits significantly is so-called large scale asset purchases (LSAP) also known as quantitative easing (QE) which add reserves and deposits in equal measure if the central bank purchases securities from nonbank sellers and this happens because the payments are cleared via the aggregate bank sector balance sheet. These transactions are designated non-borrowed reserves and occur for conventional monetary policy on a much smaller scale compared to LSAP/QE policy.
Note if a bank transacts directly with the central bank or another bank then reserves may change but deposits are not affected by these types of interbank transaction. If a nonbank transaction requires that deposit funds move from one bank to another then reserves must transfer or "tag along" with the movement of deposits. We are not showing these transactions for simplicity because the question is where nonbank customers get the funds to pay interest on aggregate loans. We are showing how banks create deposits via transactions with nonbanks since the nonbanks use these same deposits to repay principal and pay interest.


Why war can remit the economic crisis？ In the history, like Japan, in the World War II, they had a hand in the war, the root cause is the economic depression.

And in this century, some country use this method many times to remit the economic problem.

So, why war can remit the economic crisis, I just don't understand?

It is not war itself that helps to counteract economic crises, but rather the increased spending needed to support the war. In terms of the evidence to support this claim, Lee Hudson Teslik from the Council on Foreign Relations writes:

  There is an ongoing debate about the extent to which war spending affects a country’s economy. Experts disagree on the most fundamental point—whether war helps or hurts national economic prospects. Massive U.S. national defense spending during World War II is sometimes credited with rejuvenating U.S. economic prospects following the Great Depression. The journalist Robert J. Samuelson, in a primer on the topic, says there can be little doubt that military spending and mobilization during World War II reduced U.S. unemployment rates and revitalized the economy. A recent paper from the National Bureau of Economic Research concludes that countries with high military expenditures during World War II showed strong economic growth following the war, but says this growth can be credited more to population growth than war spending. The paper finds that war spending had only minimal effects on per-capita economic activity. The effects of more recent wars are equally disputed. A historical survey of the U.S. economy from the U.S. State Department reports the Vietnam War had a mixed economic impact. The first Gulf War typically meets criticism for having pushed the United States toward a 1991 recession. In a 2003 op-ed in the Guardian, economist [Joseph] Stiglitz wrote that the aftermath of the Gulf War exposes the “myth of the war economy.” Indeed, he argues that increased military spending is “unambiguously bad” for the living standards of normal citizens. Other economists argue the opposite.

I would argue the consensus generally leans towards wartime spending as beneficial to a nation's economy.

That is not the war.
After WW2, japan was not permitted to have an army. And as we know, money paid on military has a big negative effect on economy.
As in japan and Germany, after the war, both were not facing military threats, not paying for military arms (technologies, soldiers, wars, training...), and both have faced a big advance in technology in ww2 as the war required that.


Determining optimal consumption bundle The utility function of the consumer is $5x^{0.5}y^{0.5}$

The income of the consumer is $5000$

The price of good $x$ is $1,000$ and the price of good $y$ is $500$.

Determine the optimal consumption bundle.

Using the formula $\frac{MU_x}{P_x}=\frac{MU_y}{P_y}$ (1) I have derived the functions:

$MU_x = 2.5x^{-0.5}y^{0.5}$

$MU_y= 2.5x^{0.5}y^{-0.5}$

Substituting them into (1) gives:

$\frac{2.5x^{-0.5}y^{0.5}}{1000} = \frac{2.5x^{0.5}y^-{0.5}}{500}$

I'm not sure where to go from here?

Thank you in advance

I will only provide a general outline here since this is clearly a homework question.

You know that you should have, at an optimal point, that the marginal utility of each of your two goods is equal and so you can use:

$$MU_x=MU_y$$

You also have a budget constraint, yes? something like:

$$x+y=P_x(initial endowment of x) + P_y(initial endowment of y) + Income$$

Now you have enough equations to solve, I think. Isolate either x or y using your budget constraint. To be concrete here, I will assume you isolate x.

Take this representation of x and plug it in for x where you've equated your marginal utilities. This should allow you to solve for y in terms of exogenous factors. Take this representation of y and plug it back into $MU_x$. This gives both x and y in terms of exogenous factors.

So, all you are doing is equating marginal utilities and also using the budget constraint to express the optimal bundle (optimal amounts of goods x,y) in terms of exogenous factors.

U=(xy)
du/dx=y
du/dy=x
Mux=y
Muy=x
Then Budget constraints =Px.X+Py.Y=M
Price ratios px/py=y/x
1000/500=y/x
Cross multiply when you get y, put it in the budget constraints and solve for y and use it to solve for x
When you finish, equate x and y values to the price ratio to get the optimal consumption bundle.


How can the Fed enforce exit criteria if they begin yield curve control? Over the past year, the notion yield curve control has resurfaced and appeared on FOMC minutes, decades after its last implementation.
According to the Fed's introduction page:

As the U.S. continued to incur debt, the Fed was obligated to keep
buying securities to maintain the targeted rates—forfeiting some
control of its balance sheet and the money stock. The public generally
preferred to hold higher-yielding, longer-term bonds. Consequently,
the Fed purchased a large amount of short-term bills, which also
increased the money supply, to maintain the low interest rate peg.
After the war ended, FOMC members grew more concerned with addressing
the rapid inflation that materialized. However, President Harry S.
Truman and his treasury secretary still favored a policy that
maintained YCC (which also protected the value of wartime bonds by
implying a price floor). By 1947, inflation was over 17%, as measured
by the year-over-year percent change in the consumer price index
(CPI), so the Fed ended the peg on short-term rates in an attempt to
combat developing inflationary pressures.)

This poses an interesting dilemma in configuring the bounds of the program. WW2 was a one-sided victory with rather clear end date. Yet the fact that YCC continued post-WW2 suggests that terminating the program was difficult. It's conceivable that marshaling the political will to end a program that the treasury likely derives massive utility for operating against a high fiscal-deficit backdrop was a major challenge. This phenomenon is sometimes termed "fiscal dominance."
A BIS paper goes into great length on the matter. Condensing one of the themes:

For many, a long period of large fiscal deficits and very high public
debt-to-GDP ratios raises the spectre of fiscal dominance. It will in
any case accentuate the links between fiscal policy, monetary policy
and government debt management.

Question
How can the Fed enforce exit criteria without a massive/dramatic macro impairment (such as double-digit inflation)?

History and Theories of Yield Curve Control (20 pages)
https://www.boj.or.jp/en/announcements/press/koen_2017/data/ko170111a1.pdf

Lastly,  as  the  fourth  issue, I  would  like  to  touch  upon  the  relation  between  fiscal  management  and  yield  curve  control.  As  I  noted,  yield  curve  control  by  the  Bank  differs  from  the  government  bond  price-supporting  policies  once  implemented  in  the  United  Kingdom and the United States. While these policies aimed to minimize financial costs of the government, the Bank's current policy aims to overcome deflation and achieve the price stability  target.  Given  that  the  policy  directly  sets  the  long-term  interest  rates  as  its  operational   target,   however,   it   is   undeniable   that   the   area   deeply   related   to   fiscal   management expands. Not surprisingly, therefore, there are voices of concern and criticism that  the  current  policy  coincides  with  money  finance  or  monetization,  or  that  the  exit strategy of  the  policy  will  be  constrained  by  consideration  for  fiscal  management.  It  is  therefore   important   that   the   Bank,   bearing   in   mind   those   voices   as   well,   gain   the   understanding  of  the  markets  and  the  public  by  releasing  more  carefully  than  ever  the  information on the purpose and ways of thinking about monetary policy implementation.

Quantitative Easing: Entrance and Exit Strategies (16 pages)
https://files.stlouisfed.org/files/htdocs/publications/review/10/11/Blinder.pdf

Because many of the Fed’s unorthodox quantitative easing policies put taxpayer money at risk, these policies constituted quasi-fiscal operations — equivalent to investing government funds in risky assets.

I would argue that there was less spare capacity in the economies after World War 2 due to destruction of assets in many countries and due to wartime restrictions of consumption and investment. Also the household sector in the United States emerged with a relatively clean balance sheet where collateral assets were not saturated with private debt. By contrast the economies with QE today have spare production capacity and assets saturated with greater burden of private debt. I am not aware of any econometric series that compares the private debt to government debt. Rebel economist Steve Keen publishes some charts making these comparisons of private to public debt but I have not drilled down into his sources of data.


What kind of policy is minimum wage? Does it fall under fiscal, monetary, or supply-side, or perhaps some other group? Also (seeing as minimum wage is a form of price control policy), where does the broader "price control policy" fall?

Looking up each of those terms you ask about would have given you your answer.

Fiscal policy is economic policy enacted through government. The minimum wage is a type of fiscal policy.

Monetary policy is economic policy enacted through central banking. The minimum wage is NOT a type of monetary policy.

Supply-side is a macroeconomic theory that growth is best achieved through capital investment and lowering barriers to production. Usually the policy suggestions to come out of this are to remove government regulation and lower marginal tax rates. The minimum wage is a type of regulation, so minimum wage would not fall under the doctrine of classical supply side economics.

I don't understand what you mean when you ask where "price control policy" falls under. There's no real categorization for it besides also being a type of fiscal policy.

It's definitely not commonly considered a fiscal or monetary policy. You can correctly state that it's a supply side policy, although if I had to give it a label I'd call it an example of a 'microeconomic reform'.


If protectionism is injurious to a state, is the success of mercantilist China in spite of its protectionist measures? If protectionism is injurious to a state, is the success of mercantilist China in spite of its protectionist measures?

Furthermore, if the academic consensus is that most instances of protectionism are akin to using self-harm in retaliation to a perceived offensive measure, why is it still so prevalent (for example the EU Common Agricultural Policy)?

References:

  Protectionism is used for a number of reasons, some of which are
  outlined here, but is generally acknowledged to be ineffective and
  harmful to a country’s economic interests in the longer term. This is
  because it prevents the mutual gains from trade being realised, and,
  by restricting competition, limits the incentives for firms to improve
  their efficiency.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/43315/11-718-protectionism.pdf

  Our main conclusion is that, in all the scenarios we consider,
  protectionism is not an effective tool for macroeconomic stimulus.

https://www.nber.org/papers/w24353

I am not an expert on this issue, but pending an expert's answer on this matter, here are my two cents.

1. It is not true that there is a consensus that protectionism is almost always a bad thing for a country.

Many slightly non-orthodox economists (e.g. Dani Rodrik, Chang Ha-Joon) have pointed out that protectionism is a perfectly good strategy that many developing/industrializing countries have adopted, including the US in the 19th century, Japan and Korea in the 20th, and now China in the 21st.

I believe Rodrik and Chang's main argument for protectionism in this context is the infant industry argument. Another argument is the second-best argument. See this other answer of mine.

2. China's protectionism has been selective.

In my vague impression as a non-expert, in most industries in which China exports heavily (except perhaps steel), there has been little protection and great competition. Think for example of clothing and the electronics manufacturing base centered around the Pearl River Delta and Shenzhen. These are industries in which every cost advantage and innovation are ruthlessly and instantly seized upon, to the advantage of both producers and consumers (including consumers around the world).

I believe the IT industry is where China engages most heavily in protectionism. As is well known to the man on the street, many technology platforms like Google, Facebook, and YouTube do not operate in China either because they have been outright banned or because of the onerous censorship requirements. The result is that local substitutes have flourished (Baidu/Sogou for search, WeChat/Weibo/QQ for social media, Tudou for video, Taobao/Alibaba for ecommerce) and Tencent and Alibaba are among the worlds largest firms, even though most people outside China may know little of them.

But perhaps the greater bone of contention is China's "theft" of intellectual property (IP). As an explicit/implicit condition of entry, tech firms trying to enter China are usually forced to hand over their IP.

Again, these are merely my vague impressions and hopefully an expert can back these up or correct me with more concrete facts and statistics.

3. One argument against protectionism is that it provokes retaliation, which can be damaging.

However, for the past many decades, the many countries to which China exports have shown great restraint and retaliated little. These are for reasons that I am not sure about and which I hope an expert will explain. (Perhaps this is simply the same restraint that has been somewhat shown -- not always consistently and often arbitrarily -- to other developing countries in the past.)

This is now changing with the aggressive trade war launched by Trump and there are now indeed fears and perhaps even signs that China may be suffering as a result of this trade war. Huawei and ZTE are two Chinese companies that have suffered heavily from the US's uncertain on-and-off bans in the past year.

This however is to not to say that Trump's trade war is the best approach. See for example this recent piece by the right-wing, pro-trade Cato Institute ("Disciplining China’s Trade Practices at the WTO - How WTO Complaints Can Help Make China More Market-Oriented", Nov 2018). I think many economists would agree that if China does indeed engage in protectionism and one wishes to retaliate, then the means of retaliation should be through multilateral, rules-based organizations like the WTO, and not unilateral, arbitrary trade wars such as those currently being undertaken by Trump.

4. Your example of the EU Common Agricultural Policy.

I think economists are almost universally agreed that protection for agriculture in rich countries is bad for most parties (the only beneficiaries being the farmers who receive the subsidies). I have never come across any modern economist defending any such policies.

Besides, I am not aware that China engage in much agricultural protectionism and indeed, I don't think this is what people think of when talking of China's protectionism. (Recently China has imposed heavier tariffs on pork and soybeans imports from the US, but these I believe are merely strategic retaliatory measures against Trump's trade war.)

It’s difficult to disentangle exactly what you are asking in this question because of the poor grammar.

It’s been pointed out that both the UK and US have both employed protectionist measures to protect their economies before they were judged strong enough to compete. Sometimes these measures can last for some time. For example Ha Joon Chang in his book on the illusions of capitalism wrote that the textile industry in Britain was protected for around a century, if not more.

The modern twist on this is that protectionism can occur whilst still loudly proclaiming the benefits of ‘free trade’.


Ito's Lemma derivation I'm getting into asset pricing and was looking at Ito's Lemma, but cannot understand a few steps that are given.

Ito's Lemma states that given

$$dx_t = \mu dt + \sigma dz_t \\
y_t = f(t, x_t)$$

then

$$(1) \quad dy_t = \frac{\partial f}{\partial t} dt + \frac{\partial f}{\partial x} dx_t + \frac{1}{2} \frac{\partial^2 f}{\partial x^2} dx^2_t \\$$

I understand this part using chain rule and a second order Taylor expansion, of the second equation. I don't understand why then the following holds:

$$(*) \quad dy_t = \left[\frac{\partial f}{\partial t} + \frac{\partial f}{\partial x} \mu + \frac{1}{2} \frac{\partial^2 f}{\partial x^2} \sigma^2 \right] dt + \left[  \frac{\partial f}{\partial x} \sigma \right] dz_t \\$$

When I substitute in $dx_t$ into $(1)$ and use the fact that $dz^2_t = dt$, it isn't enough to arrive at $(*)$. I think $dx^2_t$ can literally be interpreted as $(dx_t)^2$, but if there is a better way of handling that term, any guidance there would be appreciated.

$$dx_t = \mu dt + \sigma dz_t \\
y_t = f(t, x_t)$$

A key idea here is that $\left( dx_t \right)^2=\left( \ldots \right)dt^2 + \left(\ldots\right) dzdt + \sigma^2 dz_t^2 = \sigma^2 dt$. The loose reasoning is that $\left( dz_t\right)^2 = dt$ and all the other terms (i.e. $dt^2$ and $dz\, dt$) are infinitely smaller than $dt$.

Horribly loose intuition for $dz_t^2 = dt$ is that $dz_t$ is normally distributed with variance $dt$, and hence the expectation of the square of $dz_t$ is $dt$.

In any case, we then have:

\begin{align*}
\quad dy_t &= \frac{\partial f}{\partial t} dt + \frac{\partial f}{\partial x} dx_t + \frac{1}{2} \frac{\partial^2 f}{\partial x^2} dx^2_t\\
&= \frac{\partial f}{\partial t} dt + \frac{\partial f}{\partial x} \left( \mu dt + \sigma dz_t  \right)+ \frac{1}{2} \frac{\partial^2 f}{\partial x^2} \sigma^2 dt \\
&= \left(\frac{\partial f}{\partial t} + \frac{\partial f}{\partial x}\mu + \frac{1}{2} \frac{\partial^2 f}{\partial x^2} \sigma^2 \right)  dt + \left( \frac{\partial f}{\partial x}\right)\sigma dz_t
\end{align*}

Which is Ito's lemma.

Maybe your Itô formula is just wrong. Look at:

http://www.columbia.edu/~mh2078/stochastic_calculus.pdf

On page 6 you will find Itôs Lemma. You don't have to interpret $dx_t^2$ as $(dx_t)^2$. The $dx_t^2$ part in your formula is in fact $(dx_t)^2$.


An easy GDP growth question A woman pays her gardener £60 per year and later married him. The gardener continues to work in the garden but unpaid. The woman earns £1000 before and after the marriage. Statement: the marriage decreases GDP by £60.

My question is why the decrease? The economy still has £1000 regardless of whether it's consumed separately or combined (herself and her husband)?

You are confusing money supply with GDP. GDP is defined as the total monetary value of all goods and services produced within the economy. For this case,

GDP =  Woman's Earning + Gardeners Earning

Before Marriage = 1000 + 60 = $1060

Even though the woman has $940 she was still compensated $1000 for whatever service she provided. The money supply is 1000 but GDP is not.

Post Marriage = 1000 + 0 = $1000


what percentage of a banks money do they lend Say a bank has 1 billion dollars deposited by individuals with bank accounts. How much of this does the banks lend/invest? Obviously it can't lend all of it or when I go to the bank there would be no money for me to take out. I realize this probably varies between institutions but in general about how much.

Also, what factors would contribute to the percentage they lend relative to the amount the bank has. For example, interest rates, inflation etc.

I'll put my comment as an answer and add one or two things. To see how much a bank lends in comparison to deposits, you can look at what is called the loan-to-deposit (LTD)ratio of banks in their annual reports. Usually it is between 60% and 90% but as you mentioned this can vary upon institutions .. And geographic areas as well ! For instance, in 2015 in the EU the average LTD ratio was 108% whereas in the US the average is about 79%. You can check per state the LTD ratio from data gathered by the Fed and the FDIC.

As to factors that determine this amount, I would probably put regulation as the first point. If I had to think about other macro points that could affect the LTD I would probably mention interest rate and in particular LIBOR rates as they tend to give an idea about the financial stress on the banking level and therefore to a certain extend the willingness for a bank to lend money and/or to require more liabilities.

Banks do not make loans using deposits from their customers. So there is never a risk of running out of money to lend. Banks create money when loans are made, and the money is destroyed when the loan principal is repaid.

The only real limit to the amount of loans banks can make is their appetite for the risk that the loan will not be repaid, and mandated capital requirements. Customer deposits are not involved, and neither is any of the banks own profits.


Do current Central Banks need to target a monetary aggregate as they set interest rates for a target inflation? On reading a textbook, the author state that after the 80's, and the serious consequences of thinking that inflation could be controlled by just targeting a monetary aggregate, modern central banks(CB) have shifted their paradigm to a targeting inflation by setting the interest rate.
My question is if the CB sets the interest rate, does he need to target M0? Or does the CB just print money according to money demand?

Any help would be appreciated.

The demand for liquidity is usually defined as
$$
L(Y,i)
$$
where $Y$ is income and $i$ is the nominal interest rate. In equilibrium this equals the aggregate money supply $M$ which is function of several things, like $M_0$ the reserve rate, etc. Let us assume that everything except $i$, $M_0$ and $M = f(M_0)$ is constant. Then
$$
L(Y,i) = M = f(M_0).
$$
Demand for liquidity decreases in $i$ and $M$ increases in $M_0$. Thus for any given value of $i$ there is at most one equilibrium value of $M_0$, hence the central bank cannot simoultaneously set both $i$ and $M_0$ and always expect an equilibrium outcome. Lacking equilibrium either $i$ or $M$ will shift.


How large is the Underground Economy in the U.S How large is the Underground Economy in the US, and is it growing or getting smaller as a percent of GDP?

There has been some research on this. For example, see the papers by Cagan (1958), Tanzi (1983) and Schneider (2007), Schneider et. al (2010).

If you would like a survey kind of thing, there is a staff paper from St. Louis Fed: Restrepo-Echavarria (2015). Link: https://www.stlouisfed.org/publications/regional-economist/january-2015/underground-economy
and also Schneider and Enste (2000).

Based on Table 3.3.3 (page 24) of Schneider et. al (2010) and the discussion (page 17-19 of same paper) which makes me believe that the numbers on the table are percentage of GDP, USA moved from 8.8% in 1999 to 8.4% in 2007 with a country average of 8.6% in this time period.

Note that (as these papers would mention) there is significant debate about defining and estimating "shadow economy".

References

Cagan, Phillip. "The Demand for Currency Relative to the Total Money Supply." Journal of Political Economy, August 1958, Vol. 66, No. 4, pp. 302-28.
Restrepo-Echavarria. "Measuring Underground Economy Can Be Done, but It Is Difficult"
Federal Reserve Bank of St. Louis The Regional Economist, First Quarter 2015, Vol. 23, No. 1
Schneider, Friedrich. "Shadow Economies and Corruption All Over the World: New Estimates for 145 Countries." Economics: The Open-Access, Open-Assessment E-Journal, July 2007, Vol. 1, No. 2007-9, pp. 1-66.
Schneider, Friedrich & Buehn, Andreas & Montenegro, Claudio E. "Shadow economies all over the world : new estimates for 162 countries from 1999 to 2007," , 2010, Policy Research Working Paper Series 5356, The World Bank.
Schneider, F. and Enste, D. Shadow Economies: Size, Causes, and Consequences. The Journal of Economic Literature, 2000 , 38(1): 77–114.
Tanzi, Vito. "The Underground Economy in the United States: Estimates and Implications." Staff Papers—International Monetary Fund, 1983, Vol. 30, No. 2, pp. 283-305.

Massive, and only going getting bigger with the popularity of cryptocurrencies in black markets. As overpriced and speculative of an asset as they are, it's allowing shadow value flows like never before in modern tax systems, and even more so in the world's most impoverished and destabilized  economic systems such as Venezuela (not the Petro). There are very big players in Bitcoin, Monero, etc, and in some form, cryptocurrencies are going to stay around for a while.

It's pointless trying to estimate the exact share of hidden transactions in an economy, but it has certainly grown since the post-WWII economic and information boom.


Do stock markets price in existential risk (i.e. global nuclear war)? Question Moved from Money StackExchange:
  https://money.stackexchange.com/questions/74002/do-stock-markets-price-in-existential-risk-i-e-global-nuclear-war

Q: Do stock markets price in existential risk?

The Cuban Missile Crisis in November 1962 is an example of coming to the brink of global nuclear war, and while the markets were down until its resolution, the index price did not seem to reflect anything resembling "imminent end of the world".

More recently, Putin's declaration to escalate nuclear weapon systems development, Trump's comments on expanding nuclear capabilities, and Noam Chomsky declaring the exchange "very frightening" suggests that we're in a period of elevated nuclear war risk.

However, the US stock markets are at their historical highs. How can this be resolved? I can think of two possibilities:

Markets accurately reflect the risk. Cuban crisis was a real, but small risk, thus the market dip. Today, the risk is nearly zero, thus the markets are not down.
Markets ignore existential risk. Rational investors expect a return on investment, but if the investors believe an event would kill them and their estate, the loss due to that event is irrelevant. Thus the risk of existential, planet destroying events, does not correlate with the stock market prices.

Is this true, can stock market price be trusted to reliably reflect existential risk?

I don't have anything to say on the empirical side.

On the theoretical side, I think that is an interesting question, even in a standard framework with "rational" agents. The possibility of the end of the world reduces the expected stream of income from assets (e.g. a share of a firm) because maybe the firm will not be there any more to distribute dividends.

Maybe you will not be there (that's the existential risk). About this the prediction of the standard microeconomic theory is the same as in the science fiction movies : your preference for present should rise, the 'natural' interest rate and the actualization rate with it. (If you fear to be dead tomorrow, you will not lend your money today... unless for a very high interest rate.) That means the value of future income falls and you want to consume everything now.

So both effects go in the same direction and "standard" prediction would be that the stock prices should fall.

If the Great Depression and the recent Great Recession, economic dislocations in both banking and investment systems, are valid predictors of personal and societal adverse economic consequence from similar future events; one need only predict that the economic confusion caused by a major loss event (from a natural disaster like a massive San Andreas earthquake to a new Korean Peninsula war, with or without nuclear weapons, et al.) would itself cause a major economic downturn lasting about 3 years even with adequate governmental counter stimulus to nearly a decade for a return to full organic economic growth (as these were apparent results in both the Great Depression and Recession).


Does an increase in the money supply increase or decrease interest rates? What I understand is that an increase in the money supply brings about a fall in interest rate as there is more money available, the price of money will be cheaper. But some theory such as liquidity effect posits that increase in money supply will increase in interest rate. Is that they view the problem differently or the two situations are different?

  "Money growth also affects interest rates and prices and those in turn will
  influence stock prices. Assuming that money demand remains constant, increase in money supply raises interest rates thereby increasing the opportunity cost of holding cash as well as stocks. Lured by higher interest earnings, people are likely to convert their cash and stock holdings to interest-bearing deposits and securities with obvious implications for stock prices. Since the rate of inflation is positively related to money growth, an increase in money supply may lower the demand for stocks and assets (as real value of such assets decline due to inflation) resulting in higher discount rates (as banks become more cautious in its lending) and lower stock prices. The rising interest rates and inflation will also adversely affect corporate profits (earnings) leading to lower stock returns (both actual and expected) and thereby making stock possession (as well as new purchase) less attractive."

The above is quoted from an article. It mention that increase in money supply raises interest rates thereby increasing the opportunity cost of holding cash as well as stocks. I don't understand how increasing in money supply would increase interest rate. Could you explain?

I will frame this in the context of modern monetary policy and for the sake of clarity assume we are discussing the American economy.

1) Whenever the Fed wants to bring about some change in the economy, they do so by using one of three tools: open market operations, setting the discount rate, setting reserve requirements. I will only discuss open market operations. The Fed recently introduced two new tools: interest on excess reserves and forward guidance. I include these to be complete.

2) The Fed conducts open market operations through its NY branch's buy/sell desk. In simple terms, the Fed can buy/sell securities in the open market. This causes two things: a change in total bank reserves and security yields (by way of shift demand/supply curves, for example).

Your question is whether or not it makes sense to think about an increase in the money supply causing an increase in interest rates. Since we want to discuss increasing the money supply, let's assume the Fed is buying securities in the open market. Whenever the Fed buys securities, it buys securities from banks and 'pays' the banks by 'adding excess reserves' to the banks' balances at the Fed. Total reserves in the banking system rises. All else being equal, banks have more money to lend. This increases the available supply of loanable funds. Since we assume demand for loanable funds is unchanged, and since interest rates are the equilibrating force in this market, we should see that interest rates drop (because the supply curve shifts right/up).

You might also want to think in therms of what is happening to security yields. If banks start buying a large amount of securities in an effort increase the money supply, we should see a large increase in demand for securities. Assuming all else equal (in particular, assuming that there is no change in the supply of securities) we should see yields on securities fall (this is equivalent to the purchasing prices of securities rising).

And so we see that the logic, whenever we consider either adjustment mechanism, points toward a fall in interest rates whenever the Fed increases the money supply.

With this in mind, I think it is reasonable to conclude that the paper you've cited gets it wrong. And as a point of fact, we have witness recently (during QE) that money growth is not necessarily inflationary...as counterintuitive as that might be.

The Fed is responsible for promoting macroeconomic stability, which it accomplishes by controlling the money supply.
It is important to realize that by controlling the money supply, the Fed changes interest rates. When the money supply is
changed, interest rates follow. However, the Fed’s decision to change the money supply is not the final determining factor
of interest rates. The combination of the Fed’s control of money and how consumers react to this change makes up
equilibrium in the money market. To find the equilibrium interest rate, you must combine both the demand for money
and the supply of money. Once you combine these two factors, you can determine at what interest rate borrowers are
willing to borrow and at what point the Fed is controlling the supply of money.
At times, the interest rate can change without a change in money supply. If people attempt to increase their money holdings
by converting assets into money, interest rates will rise. Conversely, if people decide to increase their assets by
converting money into bonds or other non-monetary holdings, the interest rates will decrease.
Note that the Fed can only assume how the public will react to a change in the money supply. If consumers for some
reason decide to react differently to a policy change, the Fed must then reexamine the situation and try to introduce a
policy that will best remedy the problem. Ultimately, it is the consumers and borrowers who change interest rates. The
Fed can provide incentives to motivate the public; they cannot ultimately control these variables.