Why would banks not want to lend, under Federal Reserve's Main Street Lending Program? The Fed is paying 95% of the loan, so why would the banks be scared of lending?
Even if the bank loses their 5% because they partaked in Fed's Main Street Lending Program, can't the Federal Reserve or US Treasury can bail out and rescue the bank?

The Trump Administration Says a New Bailout Program Will Help 35 Million Americans. It Probably Won’t. — ProPublica

  Banks Might Not Lend

  Another problem is the mechanism by which the program will be implemented: through banks.

  The Federal Reserve doesn’t normally lend to nonfinancial companies. So, as with the Paycheck Protection Program, banks will take on the responsibility of studying the finances and prospects of each business that wants a Main Street loan and decide whether to approve it.

  To protect taxpayers and incentivize the banks to make good loans, the program requires banks to keep between 5% and 15% of the debt — and thus a portion of the risk — on their own books. But that clause also deter banks from participating.

  Putting their own money on the line could be an obstacle, said Christy Hester, director of growth and development at the Independent Bankers Association of Texas. “It means they’ve got accounting and reporting requirements,” she said. “Just setting up the accounting side of that and the servicing side of that, if it’s not already set up, that’s a pretty big burden for a small community bank.”

  The Small Business Administration, which is administering the lending program, has said it will disclose the names of companies that got loans — just not yet. News organizations are suing to stop the delay.

  The Main Street program compensates banks by allowing them to charge an origination fee of up to 1% of the loan, plus an annual servicing fee. Because it’s so difficult to assess the risk of lending money in the climate of pandemic-induced uncertainty, that might not be enough.

  It’s not surprising that banks would prefer to receive higher fees and take on less risk. But it does mean that running the program through the banks could slow things down.

What Is the Federal Reserve Main Street Lending Program? - SmartAsset

  More specifically, once your company gets its loan, the Federal Reserve will buy up 95% of the loan from the bank, leaving just 5% with the bank that originated the loan. The term of these loans is four years, and amounts generally range between \$1 million and \$25 million. These loans cannot be used to pay off any other existing debt the borrower has.

  The Federal Reserve will be purchasing up to \$600 billion in loans.

I saw these two answers on Reddit or Quora, but I can't find them now. Just edit this if you do.

Because the potential losses are much bigger than 5% if you read the program. Consider the pari passu clause. In a liquidation, what's the collateral that the Main Street loan has a claim to? Collateral that is securing any existing loans you’ve granted! Thus your loss can easily outstrip the 5%, as it eats into existing collateral and increases a bank's deficiency.
Even if the bank just loses 5%, the people needing this money are going to be very risky and banks can focus their time and efforts on way less riskier programs. Contrary to popular belief, a bank doesn’t just magically get bailed out with zero pain anytime they lose some money. It’s still a 5% loss which on loans of this size are significant once they get added up. Moneys have much less risky and better ways to sell their money right now.

That is why the loan program should have been more like FAFSA that use IRS data to verify businesses and grant them an amount. FAFSA get to pick a bank to service or another servicer. This is how the student loan program works. If the loans were based on credit alone then no one would get them. Doing this through the banks was a horrible idea. If you grant businesses an amount, then they are the customer that chooses the bank that gets the servicer fees as the loans are guaranteed. Not the other way around where banks are the gatekeeper to this money.
It is amazing how bad banks screwed up in the last bailout which they used just for themselves and to shore up capitalization/leverage. We were stupid to trust the banks this time ago, and by design are helping larger companies by the cronies.
The market is efficient. You have to set the right incentives and targets though.
Banks are in self-preservation mode. If they were cut out and had to go court customers with free money in guaranteed loans with windfall service fees from the bailout they would, though since we let banks be the gatekeepers to survival again they get to keep free money and they will cut risk.


Finding a maximal growth portfolio I have the following problem that asks me to solve for the "maximal growth portfolio."

  Suppose that the equilibrium stochastic discount factor evolves as
  $$
\log S_{t+1} - \log S_t = \kappa_s(X_t, W_{t+1}).
$$Solve the following maximization problem:
  \begin{equation*}
\begin{aligned}
& \underset{x}{\text{maximize}}
& & E[\log(R_{t+1})] \\
& \text{subject to}
& & E\left[ \frac{S_{t+1}}{S_t} R_{t+1}\, \middle | X_t = x \right] = 1.
\end{aligned}
\end{equation*}

It seems clear how we would derive the following solution:
$R^*_{t+1} = \exp(-\kappa(X_t, W_{t+1})) = \frac{S_t}{S_{t+1}}$.
However, my question is related to understanding the economics behind this problem. The constraint in this problem is clearly saying that whatever portfolio we construct, it must be fairly priced (given the stochastic discount factor process $S_t$). However, I don't understand why there would be a portfolio that produces a "maximal expected return." So, there are my two questions:

Why isn't the objective here unbounded? Can't we always choose a portfolio with a higher expected return (with correspondingly higher risk)?
Also, why is there a log in the objective? Would this problem work just the same as having the objective be $E[R_{t+1}]$?

Say you have a portfolio with returns described by a random variable X. Call the lowest possible realization of X: xmin. If you take a levered position in that portfolio with leverage A and financing cost r your returns are r(A-1)+AX. There will exist a value of A no larger than 1/xmin where when you get the worst return of X and the levered portfolio returns -100%. That's game over for your wealth.

So if you invest for the long run and reinvest after each period it should be clear that you can't simply arbitrarily maximize leverage to maximize long run returns. That expected log return maximization objective function is exactly the objective function of long run return maximization. This objective treats -100% returns as -infinity utility and so avoids it at all cost.

If instead you maximized expected returns this wouldn't happen. Your preference would be for unboundedly large leverage, in line with your intuition.

Another way to think about this is risk aversion. Log utility in wealth is analogous to a CRRA utility parameter of 1, while the expected return utility function a CRRA parameter of 0 (risk neutral). Since the risk neutral guy doesn't care about risk, he sees an asset with positive expected returns and wants a gigantic levered bet on it. The log utility guy is relatively risk tolerant but still worries about extreme outcomes and so doesn't want too much leverage.

And if the range of values taken by X are mostly in the range of +/- 30%, it turns out that E[log(X)] is nicely approximated by E[X]+0.5Var(X) so can be well approximated with Markowitz mean-variance portfolio optimization where lambda is 1/2. Where as E[X] preferences is analogous to lambda of zero which won't have a bounded solution without an additional constraint.


Should Costs of Travel to Buy Goods be Regarded as Transaction Costs? Within the approach of New Institutional Economics associated with Oliver Williamson and others, emphasis is placed on transaction costs as a key factor in explaining why different forms of economic organisation arise in different circumstances.  Transaction costs have been defined, eg here, as including search and information costs, bargaining and decision costs, and policing and enforcement costs.

Question: Suppose I go to a supermarket that I know well, buy branded packaged goods of kinds that I have bought many times before, and transport the goods home.  Should the cost of my travel to the supermarket and transporting the goods home, in this situation in which any elements of search, information gathering, etc are minimal, be regarded as a transaction cost?

Since it was mentioned in an another answer let's clear this first: whether the transportation (and its time and monetary costs) should be associated with the intended consumption of the good you are going to purchase, or it can be considered as consumption on its own, depends on your subjective view of it: do you derive any form of pleasure by the trip itself? If yes, at least part of it should be considered consumption per se.

The consensus among economists appears to be that most of such travel is not considered by the consumers as utility-enhancing per se (although trends like "family-shopping on Saturday" may say a different story), and so it should be interpreted in a different way.

In the field of Industrial Organization, the good's distance from the consumer has been often treated as an aspect of product differentiation.

You could certainly treat it as a "transaction cost", by suitably define the scope of the concept. Personally I prefer to think of it as an access cost. I hit upon this concept in a little side-research I did in hedonic-price analysis.

If you start to think about it, all packaging and transportation costs from the supplier to the shop are also "access costs" from the point of view of the consumer. They don't provide any direct utility to him -they are obligatory costs that end up increasing the price, so that the consumer is able to acquire the good and enjoy the services/utility of the good itself.

Think computers: only the materials themselves and the technology embodied in them provide utility to you (plus maybe the brand). But the price includes all shorts of overheads, like the access costs I mentioned, or marketing costs (that can be seen as information costs or as the price to pay for competition and the innovation and product variety that brings along), etc.


Why was the price of gold lower when gold confiscation act was issued but raised afterwards? I was reading up on the gold reserve act which made it illegal for US citizens to own gold with some minor exceptions.

According to the gold confiscation act which was issued before the gold reserve act the government paid 20.67$ per troy ounce.

  Executive Order 6102 required all persons to deliver on or before May 1, 1933, all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange for 20.67\$ (equivalent to $408 in 2019)[5] per troy ounce.

However shortly afterwards the government raised the price for gold to 35$ an ounce.

  The price of gold from the Treasury for international transactions was then raised by the Gold Reserve Act to \$35 an ounce (equivalent to $691 in 2019)[5]. The resulting profit that the government realized funded the Exchange Stabilization Fund established by the Gold Reserve Act in 1934.

The reason gold was confiscated was to end deflationary tendencies . But why does the government raise the price of gold AFTER the confiscation? Wouldn't the effect on deflation be the same if they fixed the price of gold at 35$ in the beginning?
It is stated that the governement used the profit to fund the Exchange Stabilization Fund Is this the only reason the government set the price of gold AFTER all the gold has been collected?

Answer to Q1:

Wouldn't the effect on deflation be the same if they fixed the price of gold at 35$ in the beginning?

Yes it should. The value of currency under gold standard is given by the price of gold so if one ounce of gold is set to be worth $\\\$100$ then $\\\$1$ will be worth $1/100$ ounce of gold. If government would set the price for gold to $\\\$200$ per one ounce then the value of $\\\$1$ would be only $1/200$. Hence increasing the price at which dollar exchanges for given amount gold is inflationary under the gold standard.
The rationale for confiscating gold is actually already hinted at on that Wikipedia page:

The main rationale behind the order was actually to remove the constraint on the Federal Reserve preventing it from increasing the money supply during the depression. The Federal Reserve Act (1913) required 40% gold backing of Federal Reserve Notes that were issued. By the late 1920s, the Federal Reserve had almost hit the limit of allowable credit, in the form of Federal Reserve demand notes, which could be backed by the gold in its possession.

Wikipedia does not mention source for this statement,  but it is a statement that you will find across literature (see below). Furthermore,  Wikipedia is not clear about this but the reason why Fed was running out of gold reserve was that people expected that there will be devaluation of dollar so people wanted to earn profit by first converting dollar for gold at the Fed at the old price $\\\$20.67$, then wait for the devaluation of dollar to happen and then convert gold back to dollars at higher price (they could not know exactly what the higher price will be but it was reasonably expected that there will have to be some devaluation to combat deflationary pressures).
For example, according to Bordo 1989:

that rumors of devaluation appearing weeks before the banking holiday-events such as bills in Congress proposing to devalue the dollar,
statements by leading financial figures, and FDR’s unwillingness to
commit himself to the current exchange rate-triggered the run on the
dollar. The run manifested itself in both an internal and foreign demand
for gold by individuals and central banks. l9 Furthermore, he argues
that though the increase in currency was three times the amount of
gold reserves lost by the New York Fed, the fact that gold losses
threatened to reduce the Fed’s reserves below the legal limit-while
at the same time it had a virtually unlimited ability to meet demands
for domestic currency-was crucial.
Wigmore also attributes the calm which immediately followed the
banking holiday to the Roosevelt administration’s international policies: the embargo on gold ownership and export, and restrictions on
foreign exchange dealings. The former cut off the domestic channels
for a speculative run on the dollar, and the 60 percent devaluation of
the dollar in the ensuing three months removed the source of the speculative pressure

Answer to Q2:

It is stated that the governement used the profit to fund the Exchange Stabilization Fund Is this the only reason the government set the price of gold AFTER all the gold has been collected?

Well we can only make conjectures about what was going on in the heads of government officials at the unprecedented times of Great Depression, but I would guess their main objective was to prevent the speculative run on and  fall of gold reserves. Getting funds for the program was probably secondary issue. There might have been further non-economic reasons (e.g. political reasons).


Are interest included in the computation of government debt I am completely new to economics and I have troubles understanding how the government debt of countries is computed.
Imagine government of country A issue some 10 years bond of the value of 100 dollars with fixed interest rate of 5%, and government of country B issue some 10 years bond at 10 year of the value of 100 dollars with fixed interest rate of 7%. Is the government debt of the two country going to increase of 100$ each or the difference between the two interest rates is taken into account?

As originally written, parts of the question are unclear. We do not normally calculate the government debt of two countries together, they are calculated independently. Adding up debts across countries can be done, but the debts are quite oftenly in different currencies, so that would need to be taken into account.

The standard for government debt calculations is to add up the face value of all debt emitted. Yes, this does not take into account the differing interest rates, but one can usually find out the average interest rate. So in your example, both countries have debts of \$100.

(As an example, the U.S. Treasury has a webpage on “The Debt to the Penny”, with the total face value of debt; Link to FAQ. Per issue data is found in the reports available here: link to Monthly Statement of the public debt.)

One could look at the market value of government debt, but these data are not usually provided by national statistics offices. Financial data providers (bond indices) have this, but the data often misses out short-term debt, and non-marketable debt.


How does a cash deposit change the M1 measure of the money supply? The question asks what is the immediate effect of the cash deposit on the M1 measure of money supply. The official answer is "There is no change in the M1 measure of the money supply. (Demand deposits increase by the same amount that cash holdings fall.)." However, I think the some of the money deposited into the bank will be lend out and deposit into other banks and so on. So the multiplier also applies here, so the money supply should increase by the multiplier times the cash deposited minus the cash deposited(minus because cash holding has decreased). Why is that not true?

Please suggests if anything is not clear.

My guess: maybe it is because the question asks "immediate" effect and hence does not include the process of money being lend out again etc.?

It's best to always check the exact definitions for M questions, because they can vary a little between countries.  I'll use the US Federal Reserve's here, viz. "M1 is defined as the sum of currency held by the public and transaction deposits at depository institutions (which are financial institutions that obtain their funds mainly through deposits from the public, such as commercial banks, savings and loan associations, savings banks, and credit unions)."

The reason M1 doesn't increase is essentially semantic. Before the deposit occurs, M1 is the sum of currency held outside the banking system ("held by the public") and deposits at banks etc. Notice that currency held by the banks is not included in the M1 definition.

When the deposit occurs, the accompanying double entry book keeping is [debit cash, credit customer deposit]. Now the cash is held by the bank, so not included in M1, but the customer deposit that was created by the cash deposit is - so there's no change. This is the best way to handle this btw., since once the cash is deposited at a bank, it's no longer playing an active role in the money supply.

As far as the potential impact on the reserve requirement, and multiplier effect. As you're quite rightly suggesting, the question is trying to avoid that by saying "immediate". However, if you're in the USA, reserves no longer control the money supply the way the text book tries to describe, so there would not be expected to be a long term impact either. (reserve requirements only cover a fraction of bank deposits, and capital requirements actually dominate in terms of regulatory impact.)


Did the Bank Of England say QE doesn't work? https://www.bankofengland.co.uk/working-paper/2020/does-quantitative-easing-boost-bank-lending-to-the-real-economy
Staff Working Paper No. 883 Published on 14 August 2020
From the conclusion:

If the policy objective is to provide an additional boost to the economy through supporting bank lending in a time of stress and uncertainty, it might be valuable consider using alternative credit easing tools. This may include programs such as Funding for Lending Scheme (FLS), Term Funding Scheme (TFS) and Term Funding Scheme with additional incentives for SMEs (TFSME). Other alternatives include guaranteed lending to small businesses, with no access to capital markets, or allow access to central bank balance sheet, maybe through a central bank digital currency. Our findings also encourage policy makers to pay attention to the type of asset purchased via the QE programs in relation with banks’ exposures (Rodnyansky and Darmouni, 2015). This is key to achieve an effective transmission of QE impact to the real economy via bank lending.

Am I understanding this correctly as saying that QE doesn't meet the stated goals? Or is it (in some way I don't follow) saying that it doesn't meet some subset of goals? If the latter, what does it achieve?
If it is saying that it achieves nothing much, why still do it?
(Edit, picking up @brian-romanchuk comment)
The abstract says

Overall, our findings suggest that, if banks are not adequately capitalised, risk-based capital constraints can limit the transmission of expansionary unconventional monetary policies via the bank lending channel, and provide incentives for carry trade activities.

What I'm asking is, what work is "via the bank lending channel" doing in this sentence? Is QE achieving things in some other channel?

Stated goal of monetary policy is low and stable inflation:
https://www.bankofengland.co.uk/monetary-policy
Tools for setting monetary policy are bank rate and quantitative easing or asset purchase programs.
One way to view the central bank tools is to identify the combination of the government deficit spending and private credit market system as the two drivers of aggregate demand. During war time since World War II, for example, the modern governments deficit spend, cause full employment, and shift resources from domestic consumption and investment toward war time uses, and this would cause inflation unless the government and/or central bank institute policies to curb high inflation. Take away government deficit for war spending and you are left with the peace time deficit and private credit system as drivers of high inflation. The central bank increases the bank rate to reduce inflation caused by the combination of government deficits and private credit market activity. But if there is deflation then bank rate cannot be decreased below zero to stimulate the provision of credit so this is called the Zero Lower Bound (ZLB). Quantitative easing is used at the ZLB but does not necessarily stimulate credit formation to generate mild inflation.
During a modern financial market crisis the banks and other financial intermediaries have problems with solvency and liquidity. Banks and financial intermediaries (FI) develop a liquidity problem (modern bank runs) when the depositors or investors in the FI suspect that a solvency problem will begin to wipe out equity claims due to bad loans in the asset portfolio. The so-called global financial crisis was triggered by solvency concerns and developed into a market crisis where banks and FIs could not develop liabilities or place new paid-in equity to keep cash flowing in the payment system. The central bank had to provide liquidity to keep the solvency problems from getting worse due to market reaction to the solvency problems.
Quantitative easing (QE), also known as large scale asset purchases (LSAP) or asset purchase programs (APP), injects liquidity into the aggregate bank sector when the central bank purchases financial assets from banks and/or nonbanks. So if the goal is to solve the liquidity problem during a financial crisis then QE may be a solution to this part of the problem. But if the goal is to stimulate bank lending or lending by financial intermediaries to stimulate the economy then QE may not be a solution.
I don't know about the finance in United Kingdom. In the United States during the 2008 financial crisis the FDIC increased the amount of insured deposits; the Fed injected reserves and deposits into the aggregate bank sector by buying securities from non-banks; the Fed paid interest on excess reserves (IOER) to keep banks from purchasing short term Treasury securities paying lower rates of interest than the IOER policy rate; the banks and Fed purchased mortgage-backed securities guaranteed by the Treasury through the federal home loan guarantee programs; and the nonbanks purchased more short and long term Treasuries to hold in their liquidity cushions. This means the combined actions of Fed and Treasury provided more central bank liabilities and federal government liabilities to hold in the aggregate bank and nonbank liquidity cushions and probably this was not a policy accident but a plan by the leaders of the central bank and Treasury to help the markets adjust to the crisis with less deflation than without a bailout.
So the combined actions of FDIC, Fed, and Treasury provided liquidity to both the bank sector and the nonbank sector. In general the Fed and banks purchased assets guaranteed by Treasury paying higher interest (Agency and guaranteed MBS) and the nonbanks held the Treasury securities paying lower interest in the period after the federal government expanded the Treasuries float and federal guarantee in the asset pools called mortgage-backed securities. One purpose of these programs was to provide liquidity. Another purpose might be to allow bad debts to be written down by the banks and financial intermediaries while the government helped the banks to recapitalize. Another concern would be to use deficit spending and/or monetary policy to stimulate the economy so it would not go into a deep recession and QE may not be effective at solving that macroeconomic problem. But I think QE would provide liquidity and help banks recapitalize compared to a counter-factual outcome where the government lets the markets determine winners and losers by portfolio allocation decisions made during a financial panic.


Does Singapore's computation of the Gini coefficient exclude low-paid foreign workers? The Economist (2015-07-16):

But Singapore measures its coefficient rather differently, excluding shorter-term foreign workers and non-working families.

More generally, how is Singapore's Gini coefficient computed? To what extent is it comparable (or not comparable) to those reported by other countries?
In June 2020, there were 940,200 Work Permit holders, of which 252,600 were "Work Permit (FDW)" holders (i.e. maids) and 351,800 were "Work Permit (CMP sectors)" holders ("Construction, Marine Shipyard and Processes).
In mid-2019, Singapore's total population was 5.7M.

More generally, how is Singapore's Gini coefficient computed?

According to the Singapore's ministry of finance (MOF):

Singapore’s Gini coefficient is typically reported based on household income from work per household member. The calculation by the Organisation for Economic Co-operation and Development (OECD) is based on the Square Root Scale. ...
... Singapore’s Gini is based on household income from work whereas data on OECD economies is based on income from all sources (which includes non-work income from investments and property).

Their full report on "Income Growth, Distribution and Mobility Trends in Singapore" has more details and you can find even more details in the sources reported therein.

To what extent is it comparable (or not comparable) to those reported by other countries?

There is no simple way of measuring 'comparability'. Generally speaking, any income distribution related cross-country comparisons are problematic and can't be taken at a face value even if the final statistics comes from the same source where the same methodology is followed (like OECD/World Bank) because even if the same methodology is followed when constructing the inequality statistics the raw data that are produced on national level might have some systemic biases as the data come from either household surveys or tax records and different countries might systematically differ in their response rate, rates of tax evasion and other sampling problems/errors (see discussion of this in Atkinson's Inequality book).
This being said despite above difficulties scientists use these statistics in cross-country comparisons (see one such example in Frazer; 2006).  So as long as you just don't take these statistics at face value they are still useful for research purposes and also just plain international comparisons. As in the Economist article you linked you can make reasonable guesses about how the differences in methodology or any underlaying data issues affect the statistics and take that into account.


Does lowering corporate tax rates increase investment or provide some other benefit to a nation? In Australia at the moment there is a move to lower the top corporate tax rate from 30% to 25% or thereabouts. The reasoning is that the benefits from investment will outweigh the cost to the budget.

There are claims either way e.g.

Malcom Turnbull (Current Australian Prime Minister)

  Malcolm Turnbull has recommitted to his government’s $48.7 billion tax cut for business over the coming decade, amid growing anxiety in corporate Australia over whether he might scale back the plan.

  The Prime Minister told a business audience in Sydney the enterprise
  tax plan remained “so important” because of the fall in global growth,
  emphasising the need for ways to boost investment.

http://www.theaustralian.com.au/business/turnbull-recommits-to-487bn-corporate-tax-cut/news-story/df2f1e43a756cf5654d59704c3cdb537

The Australia Institute claims:

  Dear Scott Morrison, lowering the company tax rate doesn't increase foreign investment.

  In fact, when company tax rates rose in the 1980s to 49% there was a
  rise, not a drop, in investment.

http://www.tai.org.au/content/about

So which way is it? Does the benefit of the tax reduction outweigh the cost of the revenue loss or is it the other way around? Does it depend on other factors? Are there other benefits that may not exactly be investment, like moving offices?

Cutting corporate taxes is one of the tools of the Trickle-Down Economics (TDE) school  of managing economic growth. In a New York Times article in 2012, economist Robert Frank of the Johnson School of Management at Cornell University summarized the findings of years of research about the effectiveness of applications of this theory.

In his article, he discussed taxes on individuals, rather than on corporations, and there are substantial differences, but I believe the mechanics of the behaviors of these two economic subsystems are the same with respect to drag effects, such as taxation. They are linked in that tax reduction on individuals was expected to spur increased demand for consumer goods and services, which in turn was expected to promote industrial expansion to meet the growth in demand.

In short, he states (and cites research to support the view) that this theory has never been demonstrated to work. In fact, it may be counterproductive in the case of individuals, who tended to save the additional wealth acquired through reduced taxation in tax havens, which have negative effects on growth.

Corporations tend to view taxes in one of two ways, depending on their economic context, their corporate strategy, and their resources.  When they are short of investment funding, reductions in taxation can lead to an increase in their investment if their strategy dictates that, and their economic context allows it. If they are not short of investment funding, reducing their taxes will normally have little effect on capacity; their capital investment strategy is already adequately funded.

However, most middle-to-large size companies view their treasury function's capacity to raise capital through floating stock or taking on debt as the primary source of funding for investments.  They may consider a tax rate reduction as a windfall in the short term, and use it to buy back stock or lower debt.  In the longer term, they may issue or increase the size of dividends, or acquire another company, rather than increasing net capacity. In this case, the shareholders receive that portion of the tax cut, and the mainline TDE effects on individuals come into play. As John Kenneth Galbraith and others have demonstrated, these capital gains for individuals do not lead to increased individual spending. As a result, there is little to no effect on capital investment, since there is no substantial increase in demand to meet.

As long as their economic context warrants it, smaller businesses that do not normally use a treasury function take on debt or issue stock may choose to use a tax reduction to fund expansion, reduce debt, distribute the increase in net income as profits to their owners, or retain it as capital. So, even in this case, an increase in capital investment is only one of the possible outcomes.

For a company's economic context to warrant expansion, the company must:
a) anticipate an increase in demand, or be already faced with unsatisfied demand, or both;
b) have the means to manage expansion, or be able to acquire them;
c) be able to compete effectively against current competitors and potential market entrants;
d) be sufficiently free from higher-priority obligations to other parties that could consume the additional net income or capital raised, such as corporate debt payments, obligations to improve / repair operations for regulatory reasons, liabilities from litigation and product warranty repairs, etc.;
e) have at least one viable channel of investment in capacity to deliver products or services, either through introducing new ones or expanding the delivery of existing ones

It should be noted that this is not just a theoretical discussion; the consequences of using this theory are staggering. David Stockman, Director of the Office of Management and Budget under President Reagan from 1981 to 1985, was a staunch advocate of TDE theory. The theory was repackaged and rebranded as "Supply-Side Economics" to avoid the stigma associated with the name of TDE. However, Stockman observed the national debt increase from 908 billion dollars in the last year of the Carter Administration to 2.1 trillion dollars (a 130% increase) by 1986. Clearly, the fiscal side effects on the government were unsustainable. He resigned in 1985, and became a vocal opponent of TDE. In December 1981, years before the negative effects became widely known, the Atlantic Monthly published an interview with Stockman himself, "The Education of David Stockman", which was highly critical of the strategy.

You can find other references to research criticizing the effectiveness of Trickle-Down Economics here.


Does treasury pay interest+ face value to the fed? heard all the profit that the fed makes goes into treasury.. does that mean the treasury department can make unlimited money buy selling bonds to the fed? like if they issue bond to people, and the fed purchases them through OMO, then all the treasury bonds and the interest to be paid on bond will be given to the treasury right?
When someone buys a Treasury bond, the government must pay them interest. This applies to the Fed as well, but then at year-end the Fed remits the interest back to the Treasury. The federal government paid out $223 billion in interest payments last year
This is the article I was reading about

Yes, Fed sends all its profit including the ones it earns on government debt back to the treasury (this was already answered on this site here). Fed can create an unlimited amount of money by buying treasuries but not because of the interest payments but because of the debt itself.
The interest payments themselves do not generate new money in this relationship when they are paid back to the treasury, that is just juggling money around. Government, has to pay interest on its bonds and through the transfer of the profits from the Fed to the treasury any interest government paid is sent back. So for example, if the government pays ${\\\$}100$ interest payment to Fed, Fed's interest revenue will be ${\\\$}100$ higher. Fed has mostly fixed costs, variable costs associated with processing extra interest payments are small so we can reasonably assume that in this case their net profit also increases by ${\\\$}100$ and hence this money will just make a full circle from the treasury through fed back to the treasury. So the interest itself does not generate new money.
However, when Fed purchases a bond from the government it actually can do that with newly created money. That money will exist until government decides to repay the face value of the bond and Fed could just let that money exist by simply 'scrapping' the bond itself.
Through creation of new money, this way Fed and government in general is able to generate some real revenue - this is called 'seigniorage'. However,  only limited amount of real revenue can be created this way. Empirical studies show that most countries including US have seigniorage revenues around $1-2\%$ of GDP (see Haslag's Dalas Fed brief on this). That is not entirely non-trivial but also not much compared to other revenue sources.
The reason why government cannot just create unlimited ‘profits’ for itself this way is that, in economics, there is a strong consensus among top economists that only a limited amount of real spending can be financed through money creation. This is  because creating more money (aside from special circumstances as when economy is at zero lower bound) is generally inflationary which means that although you created new money they are also worth less - have lower real purchasing power (see textbooks like Blanchard et al. Macroeconomics; Mankiw Macroeconomics etc.). The government can still earn little bit of extra revenue from this, but even if it can in principle create an unlimited amount of money that does not mean it can also purchase an unlimited amount of goods and services.


Regarding a consumption aggregator: How do I differentiate under the integral sign? Let $\varepsilon>1$ and let $$C_t\equiv\left(\int_0^1C_t(i)^{(\varepsilon-1)/\varepsilon} \, di\right)^{\varepsilon/(\varepsilon-1)}$$ denote a consumption basket in time period $t$, where $C_t(i)$ is consumption of good $i\in [0,1]$. In e.g. new Keynesian models we want to differentiate $C_t$ with respect to $C_t(i)$ for some $i\in [0,1]$ so as to solve a utility optimization problem. In my lecture notes, and in many texts on this subject, it is said that $$\frac{\partial C_t}{\partial C_t(i)} = \frac{\varepsilon}{\varepsilon-1} C_t^{1/\varepsilon} \frac{\varepsilon-1}{\varepsilon} C_t(i)^{-1/\varepsilon}.$$ Does anyone know how this differentiation is accomplished? This is my question I want answered. Below I will outline how I have thought about this question.

I am prone to thinking that it is wrong. For using the chain rule I would say that the answer is the following. $$\frac{\partial C_t}{\partial C_t(i)} = \frac{\varepsilon}{\varepsilon-1} C_t^{1/\varepsilon} \left(\frac{\partial}{\partial C_t(i)} \int_0^1C_t(i)^{(\varepsilon-1)/\varepsilon} \, di\right),$$ which, when asssuming that the function is such that we may differentiate under the integral sign, I get $$\frac{\partial C_t}{\partial C_t(i)} = \frac\varepsilon {\varepsilon-1} C_t^{1/\varepsilon} \left(\int_0^1 \frac{\varepsilon-1} \varepsilon C_t(i)^{-1/\varepsilon} \, di\right).$$ Now, using the mean value theorem for integrals it would be possible to say that $$\int_0^1 C_t(i)^{-1/\varepsilon} \, di = C_t(j)^{-1/\varepsilon}(1-0)$$ for some $j\in (0,1)$, and insert this result above and then get a similar result to what was shown in my lecture notes. However, this would lead us to considering another good $j$ not necessarily equal to good $i$.

The reader may think that I am confusing the symbol '$i$' in the integral, for the same symbol used when differentiating with respect to $C_t(i)$, and that I should, when differentiating, consider a good $i_0$, and then perform the following differentiation: $$\frac{\partial C_t}{\partial C_t(i_0)} = \frac{\partial }{\partial C_t(i_0)} \left(\int_0^1 C_t(i)^{(\varepsilon-1)/\varepsilon} \, di\right)^{\varepsilon/(\varepsilon-1)}.$$ This may be so, but I do not know how to get the desired result from this, and if I take this approach, I would say that the derivative is equal to $0$ (!) as the integral is just a real constant if $t$ is fixed, which it is.

It is sometimes said that we may differentiate the integral just mentioned by looking at the integral as beeing a sum. What they mean by this, I do not know. Maybe they represent the integral as the limit of a Riemann sum, which it is, and write $$\frac{\partial }{\partial C_t(i_0)} \int_0^1 C_t(i)^{(\varepsilon-1/\varepsilon} \, di = \frac{\partial }{\partial C_t(i_0)} \lim_{n\to\infty} \sum_{k=1}^n C_t(\xi_k)^{(\varepsilon-1)/\varepsilon}(i_k-i_{k-1}),$$ with $i_0=0<i_1<\cdots < i_{n-1}<i_n=1$ and $i_{k-1}\leq\xi_k\leq i_k$ for each $k=1,2\ldots,n$. When the authors write that we should look at the integral as beeing a sum, this must be it. But differentiating this sum with respect to $C_t(i_0)$ would in the best cases (i.e., when we can do differentiation inside the limit) be equal to $\lim_{n\to\infty}\frac{\varepsilon-1} \varepsilon C_t(i_0)^{1/(\varepsilon-1)} \cdot (i_\alpha - i_{\alpha-1})$ for some $\alpha\in\{1,2,\ldots,n\}$ such that $i_{\alpha-1}\leq i_0\leq i_\alpha$; the problem now is that $\lim_{n\to\infty}\frac{\varepsilon-1} \varepsilon C_t(i_0)^{-1/\varepsilon}\cdot (i_\alpha - i_{\alpha-1})=0$, which is consistent with modern advanced real analysis (to my knowledge) in the sense that if we just increase or decrease the value of $C_t(i)$ at one $i=i_0$, then the value of the integral will not change, and hence the derivative should be $0$ (i.e., no change in the value of the integral for a change in $C_t(i_0)$).

Note: These problems occur when studying e.g. the so called "Dixit-Stiglitz aggregator".

Using your formalism above, you can think (heuristically) of the integral as $$ \sum_{i=1}^nC_t(i)^{(\epsilon-1)/\epsilon} $$

If we differentiate this with respect to $C_t(j)$, we get

$$ \frac{\epsilon - 1}{\epsilon} C_t(j)^{-1/\epsilon} $$

Which is exactly what we needed. To do this rigorously, you need a notion of taking derivatives on function spaces. Look up the Gâteaux and Fréchet derivatives.


Is a binding ZLB a binding constraint? Usually, in an optimisation problem, a binding constraint is one at which the optimal solution holds at the constraint with equality, i.e. it's a boundary solution.
However, in many articles, for example this one, from what I could interpret, the authors talk about non-binding ZLB as if meaning that the ZLB could be not valid, and the interest rates be negative (like in Switzerland and Japan). When talking about a binding ZLB, they seem to mean that ZLB is valid.
To me, at least, this seems to be at odds with the usual definition of a binding/non-binding constraint. Or am I missing something?

I think this is due to how terminology surrounding ZLB changed/evolved over time.
In most models ZLB is actually mathematically zero lower bound in a way that is closer to a boundary solution as you put it (see examples in Romer Advanced Macroeconomics chapter 11 and more importantly sources cited therein for the models including ZLB). Nonetheless, the ZLB result hinges on many simplifications such as that there is no cost to holding cash money. Such assumptions might be fine for model building purposes but when it comes to practical policy making those storage costs can easily result in the effective lower bound being let's say $-0.5\%$ or some other value that would have to be empirically estimated.
However, in the mean time zero lower bound somehow acquired separate meaning as being the term for the idea that interest rates cannot fall beyond zero, even if originally the terminology coincided more closely to what mathematicians would consider biding constraint. Colloquially, at least from my own experience, when people discuss ZLB at conferences/workshops they often do it in a sense of referring to the result or even sometimes just as referring to idea of lower bound rather than trying to follow mathematical terminology.


Why US market is falling due to greece fear? I'm kind of curious to learn why US markets are falling due to Greece - Eurozone crisis. US had almost no exposure to Greece bonds and the fear of Grexit and the future of Euro has made the investors to pull out of the European market. But their investments must go somewhere right? Ideally, they could try to invest in US markets, since the macroeconomic indicators of US has been reasonably stable this year. But instead, I see the US markets are also falling? Why is this the case and where is the money pulled out of Eurozone is getting invested?

As dg99 mentioned the response has actually been relatively muted so far in the American markets  (SPX down 3% or so from its peak).  Generally, problems in major world equity markets cause cascading problems in their trading partners.  In this case there are many American companies that have European stores or otherwise sell into European markets that are affected by the turmoil.  There are secondary effects as well as companies that trade with affected companies feel the pain and so on.

As you mention the news out of the US has been fairly positive, but a melt down in the EU would likely overwhelm the tepid growth in the North American region.

The important thing to note here is that the investments do not necessarily need to go somewhere.  We can just all agree that the value of European investments is significantly less now because future earnings is likely lower (really for any reason) and the price will change even if no one sells and no money leaves the region.  In a very real sense billions of value just no longer exists.   However, it is true some people have been selling and investing elsewhere.  The main beneficiary is generally safer instruments like bonds which have rallied somewhat.


Finding an intercept on percentage based data and using dummy variables How do I find an intercept on a percentage data? My data has percentage of grades ( I have converted to numbers where $A^*=8, A=7,B=6...U=0$) by ethnicity and other indicators which I want to test for using dummy variables. For example 90.3% of Chinese students got $A^*-C$ grade, Mixed race students got 87.3% etc. How do I interpret this to get an intercept? I have chosen the median 32.5 as the grades are 5 $A^*$ to $C$ (between $A^*(8\cdot5=40)$ and $C( 5\cdot5=25)$. Is the use of median in this case sensible?

My equation is going to be

$y =b_0 +b_1 +b_2+b_3+b_4+b_5+b_6+u$

where $y$ is the grade, $b_0$ is the median ( constant), $b_1$ is the free school meal, $b_2$ is Chinese, $b_3$ is Black, $b_4$ is Asian, $b_5$ is male,    $b_6$ is female, and $u$ is the error term.
White is the default.

Therefore if a Chinese male pupil does not get free school meals(proxy for poverty)it is $b_0 + b_2 + b_5$.

My question is as above, does my use of median make any sense and secondly since I already know that Chinese pupils perform better than the rest of the group do I need to use the percentage difference or use the dummy binary variables.

I want to simply find out the effect of poverty and race on the pupils expected grades. I do not have access to individual grades or panel data for income etc hence why I want to use the free school meal.

Thanks again for your answers.

Please see image below.

As Jamzy noted, run an OLS regression on grades against whatever variables you have.

$$\text{grades} = \beta_0 + \beta_1 x_1 + \cdots + \beta_i \ \text{race} + \cdots$$

$$\text{race} =\begin{array}{cc}
  \Bigg\{ &
    \begin{array}{cc}
      0 & mixed \\
      1 & Chinese \\
    \end{array}
\end{array}$$

or vice versa with the 0 and 1. $\beta_0$ will be your intercept that you are looking for. If it ends up negative, try taking the log of both sides and see if a linear regression still has a good fit for you there.


Career change to economics from software engineering I have a bachelor's degree in Computer Engineering with math courses such as Linear Algebra, Statistics, and Numerical methods.

I have about 2 years of experience as an Engineer. Although I'm fond of programming, I find my current work pointless and mechanical.

I'm wondering if it would be possible for me to switch to a career in economics, preferably doing something that has a direct impact on making people's lives better.

More importantly, would my current skills as an engineer help in such a career switch? I'm passionate about doing work that could one day have considerable impact.

I have found that a lot of universities do accept people from other backgrounds but require them to satisfy econ prerequisites before they can enter. Are these courses offered at community colleges in North America? Or can I take these at a university as a student who is not aiming for a degree?

Lastly, do economics ever serve in the private sector. I'm asking this because it seems that a lot of econ jobs would be as advisory roles in government institutions.

Apologies for not having the right tags. I couldn't find one for career.

If you are looking for a job with a title "economist," I doubt that anyone would look at you if you do not have at least an undergraduate degree in economics (in North America, anyway).

However, you could end up working for a firm that does economics, or financial research. I had a background in control systems engineering, with summer job experience as a programmer, and then ended up working as a quantitative analyst for fixed income. The programming experience ended up being probably the training that I ended up using the most. However, there is a lot of competition to get a job in finance.

Outside of finance, I believe that there is a lot of work in "big data," which involves a lot of programming.

You could end up working with economists, but you would probably not be considered an "economist."

You ask:

  Lastly, do economics ever serve in the private sector. I'm asking this
  because it seems that a lot of econ jobs would be as advisory roles in
  government institutions.

There's a lot of market economists in finance. A few large corporations still have people with the title "economist," but my guess is that most people with economics training have a different title when working elsewhere in the private sector. (As noted by denesp, Google famously has someone wih a Chief Economist title.) Public sector jobs are different in that respect.


Is there a "name" for price leadership oligopoly? Oligopoly equilibrium in the static setup consists of cournout equilibrium and bertrand equilibrium (Nash Equilibria)while in sequential games we have stackelberg equilibrium and price leadership equilibrium (subgame perfect nash equilibria).

my question is why is there no name attributed to price leadership equilibrium? Is that just how it is?

Oligopolistic competition through both quantity and price can be regarded as Stackelberg competition, provided that there is a leader firm that moves first (commits) and other players move subsequently with some information on what the leader has committed herself to. It thus describes the dynamic form of the classic Cournot and Bertrand competition.

Some explanatory background info:
Stackelberg first published his sequential move games in 1934 under the title 'Marktform und Gleichgewicht (Market Structure and Equilibrium)" (I unfortunately could not find a pdf of the paper, not even in German). And it seems that this sequential nature was indeed ground-breaking, in this case. At this point Cournot and Bertrand competition were already well known concepts, but game theory was not an established field yet ('Theory of economic games and behavior' for instance was only published in 1944). This first model apparently focussed on competition in quantity. But as this paper shows, price competition was not an unknown concept to him, either (the paper is in German but there is a English summary on page 139).


What does Varoufakis mean by 'banks can make up money' in 'Talking to my daughter about the economy'? Varoufakis' book contains some arguments and explanations. I don't have the book in English with me, so this is a 'free translation' of a couple of points (bold is mine):

  "Contrary to the entrepeneur, the banker does not organize production. (...) We're wrong to think that he is an intermediary between those with excess money and those who wish to lend that money (...). Before, it was like that. Centuries ago. Now, only in very rare occasions does the banker have that role. (...) In developed market societies, the banker does not obtain existing value (money) from some to then give it to others. He obtains it from the future, so that it's possible to use it in the present. (...)"

['Talking to my daughter about the economy', Chapter 4, section 'The "hand" of the banker']

He later, on the same chapter, goes on to say:

  "Every society has its legends. Market society is no exception. The
  fundamental legends of our time are these four:

  (...)

  Bankers lend money from savings accounts deposits.

  (...)"

Finally, later on (Chapter 5), when listing reasons for why people can't get loans after a crisis, he lists some reasons:

  "First, because banks won't lend them money, since they are themselves
  based on money that they don't own, that is, the debts of private
  parties and the State to them, which will never be payed."

What does he mean by 'banks lend money from accounts' being a legend?

I am admitedly very naive about economy in general (hence what may seem a very ignorant question) but I was always under the assumption that banks make money by charging higher interest from the money they lend then they pay people for their savings accounts. What is this 'borrowing from the future' mechanism that he describes?

Finally, doesn't the last bit contradict that? If banks can 'make up' money 'from the future', why do they depend on the money from the debts of people, companies and the State?

Banks and the finance industry have an essential function of allocating capital to productive uses, intermediating between savers and investors, and managing risk. However, banking deregulation, beginning in the 1970s (and not "centuries ago" as claimed by Varoufakis), has moved this industry toward rent-seeking activities. So, since then, bankers do not lend money from savings accounts deposits. This is "the legend". They offer financial services. They are engaged in lending by trading bonds and securities. They are engaged in futures markets (central financial exchanges where standardized futures contracts are traded - see wikipedia).

By the way, deregulation has been a very lucrative change because finance has become more profitable relative the rest of the economy. Philippon and Reshef show convincingly in a QJE paper that salaries in the financial sector have skyrocketed.


How does the Fed's stimulus push stocks markets higher? I read that the Fed’s stimulus last March has contributed to a spectacular rally in stock markets. And indeed S&P500 has increased a lot since March.
But how does the mechanism work? How does the fact that central banks are buying more US treasuries help the stock market to rally?

If there were economic laws that could be used to determine the level of the stock market, why would people post them here, and not use these rules to make money themselves? (This leads ti the Efficient Markets Hypothesis).
Stock prices are what investors are willing to pay. If investors believe that practically anything causes the price to go up, they will bid up prices. It does not matter whether these beliefs make sense.
In this case, the premise is that Fed stimulus will cause the economy to grow faster, and thus profits are likely to be higher.


Multi-item Auctions in Mechanism Design I'm new to auction theory and only started reading it a few days ago.
My question is this: Is it possible to design efficient auctions of multiple non-identical items? By efficient I mean maximize the social welfare.
Also, let's say there is only one seller who owns all items and seeks to sell them to multiple bidders who can get at most one item.
I'm a little discouraged as I haven't found a lot of theory papers on this problem. Is it because what I described above is a special of bundling (where bundle sets are singletons)?
I'd appreciate it immensely if you could direct me to a source (paper or book). Thank you.

There’s a large literature on this in both CS and Economics. For economics, a good starting point would be Vijay krishna’s Auction Theory book (2009 edition). It has a whole section on multi-object auctions.
For CS, check out some of the papers by Jason Hartline. He may have lecture notes as well. Naom Nisan and others have a book called algorithmic game theory where some chapters (if I remember correctly) deal with multi-object auctions.


Calculating the real interest rate, why would my thesis supervisor want me to subtract inflation instead of dividing by inflation? I'm writing my thesis and for the data I'm using I had calculated the real interest rate by dividing the nominal interest rate by the inflation rate. My supervisor recommended me to change it to instead just subtracting the inflation but I didn't want to ask him why since I've already asked him too many stupid questions.

I always thought dividing is the "real" way and IIRC one of my professors called subtracting the inflation rate a mere "approximation". So why would my supervisor want me to subtract it?

Two things to note here. First, subtracting inflation from the nominal interest rate is an approximation to the real interest rate, but only in discrete time. Furthermore, the "true" relationship it's approximating isn't division of one rate by the other--you have to add 1 to all three of your quantities (inflation, real interest rate, and nominal interest rate) first to get the true relationship.

Here's a brief overview. Consider the Fisher equation of

$r = i - \pi$

where $r$ is the real interest rate, $i$ is the nominal interest rate, and $\pi$ is the inflation rate.

This equation is often introduced as a linear approximation to the true real rate of interest, given by the equation

$\frac{1 + i}{1 + \pi} = 1 + r$

Let's see how this holds in a discrete time model. Denote your nominal income as $Y$ and the price level as $P$. Your real income is $Y/P$. If all this income is invested in some interest-bearing asset in a discrete time model, your real income in the next time period becomes

$\frac{Y (1 + i)}{P (1 + \pi)}$

and if we want to find a real interest rate that summarizes this change in real income, we would need to write your real income in the next time period as

$\frac{Y}{P} (1 + r)$

which gives us the identity $\frac{1 + i}{1 + \pi} = 1 + r$ that the Fisher equation approximates. However, if we work in continuous time, this breaks down. First, the units don't work out--inflation rates and interest rates are measured in percentage change per year (or some other unit of time), so they cannot be added to the dimension-less number $1$. Second, it turns out that Fisher's approximation is actually completely correct in continuous time. Using derivatives, we define our quantities as follows:

$i = \frac{dY}{dt} \frac{1}{Y}$

$\pi = \frac{dP}{dt} \frac{1}{P}$

$r = \frac{d(Y/P)}{dt} \frac{1}{(Y/P)}$.

Using the quotient rule, we can rewrite $r$ as

$r = \frac{\frac{dY}{dt}P - \frac{P}{dt}Y}{P^{2}} \frac{1}{(Y/P)}$

which simplifies to

$r = (\frac{dY}{dt} \frac{1}{P} - \frac{dP}{dt} \frac{Y}{P^{2}}) \frac{P}{Y} = \frac{dY}{dt} \frac{1}{Y} - \frac{dP}{dt} \frac{1}{P} = i - \pi$

which gives us the Fisher equation, no approximations about it!

Note that this assumes continuous compounding from your nominal interest rate. If you instead have a compounding rate of $\tau$, we would define $i$ differently, and our equation becomes

$r = \tau \ln(1 + \frac{i}{\tau}) - \pi$.

However, for the purposes of the data you're working with, I am 90% sure that this modification is completely superfluous. If you want to use something more precise than the Fisher equation, you need to know exactly how your data was computed. What price index was used to calculate the inflation rate? Under what assumptions was the nominal interest rate calculated?

In short, while I can't speak to the reasons for your supervisor's recommendation, they're definitely correct that you should subtract inflation rather than divide by it. There's a reason why we use the Fisher equation.


International Trade: Two country trade problem A country (home) is pouplated with workers who produce either Food or Clothing. There are 200 workers producing food and 100 producing clothing. Each food worker produces 6 units of food and each clothing worker produces 3 units of clothing. Workers own the output they produce and trade with other workers. All workers share the same preferences over food and clothing represented by the utility function $U(D_c,D_f)=D_c(D_f)^2$.

  (a) What is the aggregate endowments of food and clothing in this economy?

Would the answer for this just be Ef= 200*6=1200 and Ec=100*3=300?

  (b) Now assume a foreign country with 600 food workers, 300 clothing workers with productivity levels 1 food worker produces 1 unit of food and 1 clothing worker produces 2 units of clothing. Describe the pattern of trade and verify that export supply matches import demand.

Firstly, I'm really confused over what the trade relative price equilibrium should be. I know that it will lie somewhere between these two country's autarky prices. Should I just assume that the trade relative price for the home country will be foreign country's autarky price?

My calculations are as follows:

1. Setting MRS = relative trade price (denoted by subscript w, I'm assuming it is the foreign country's autarky price)

$ \frac{D_f}{2D_c}=\frac{P_f}{P_c}^w = \frac{1}{2} \\ D_f=D_c $

2. Setting the budget constraint

$ \frac{P_c}{P_f}^w D_c + D_f = \frac{P_c}{P_f}^w E_c + E_f \\
\frac{1}{2}D_c + D_f = \frac{1}{2} \cdot 300 + 1200 = 1350 $

3. Plug (1) into (2)

$\frac{3}{2}D_f = 1350 \\  D_f = D_c = 900$

This somehow does not seem to make sense to me, and I feel that my answer is intuitively wrong. I would think home would export more of the good in which they have abundance (food) in order to import more clothing.

Part (a) is correct. Your error in (b) is to implicitly assume that relative prices are equal to $1/2$.

The best way to understand the problem is using the Edgeworth box (excuse the sloppy picture; will add a custom one when had the time):

The axes represent the two goods. Their lengths are 1800 (global endowment of food, x axis) and 900 (global endowment of clothing, y axis). Point 3 represents the endowment point, which is (1200,300) for Home and (600,600) for Foreign. As the figure shows, that point is not an optimal allocation. Such optimal allocation is where the MRS for the two countries is the same (point 1), MRS which is equal to the relative price of goods (same for both countries, i.e. they are international prices).

Therefore, this allocation has the following properties:

$$ \frac{H_f^2}{2H_c} = \frac{F_f^2}{2F_c} = \frac{P_c}{P_f}$$

(I replaced $D$ with home and foreign letters, for clarity).

Notice that the ratios of consumption are the same across countries. Yet, before trade, production is such that the ratio of food versus clothing is larger in home than in foreign. Therefore, home will export food and import clothing, and vice versa for foreign. Yet, since imports of one country are the exports of the other country, you get:

$$ \frac{1200 - A}{300 + B} = \frac{600 + A}{600 - B} $$

where $A$ are exports of food and $B$ exports of clothing.

Additionally, you have that the trade balance must be in equilibrium. Therefore:

$$ P_fA = P_cB $$

Here you have all the equations you need to find the solution in terms of final consumption levels and relative prices. Let me know if this is enough. I can guide you further if you need.


How does migration facilitate specialisation? When migrant workers arrive in a country, how do they facilitate specialisation? Is it by freeing up workers from jobs they do not want to do?

Workers may have different skills. If immigrant workers are good at farming then domestic workers can shift into non-farming activities.
Workers increase the total population and larger populations can sustain greater specialization. For example, with enough people we can have an artisanal pencil sharpener and professional crossword puzzle maker but a smaller population couldn't sustain that as a career.
Migrants tastes may differ from domestics and domestics may develop businesses to address these tastes. For example, bidets are not common in the United States but Kohler, an American toilet manufacturer, is happy to have its workers make them for immigrants that enjoy them.


Why would China's FX reserves stay flat as the Fed ramps up its balance sheet? As seen in the chart, China's FX reserves have remained flat lately despite the massive balance sheet expansion of the Fed. Though out of the temporal domain of this chart, if it were extended back to 2008 we would see the ensuing years saw a large increase in China's FX reserves.

I can think of a few possible explanations ranging from political tension to dollar liquidity needs, but I don't think I can take my explanations beyond conjecture.

Question

What is a logical explanation for the recent divergence between Fed liabilities and China's FX reserves?

There is no necessary relationship. Canada is a major trading partner of the United States, and the Fed can increase its balance sheet without Canada increasing its official reserve holdings. Why should China be different?


Is economics a science based more on statistics (observations) rather than rigorous reasoning? The world is now more complicated than ever. We are all building upon the shoulders of our forerunners. We cannot understand where everything came from and how everything has evolved, and hence we don't understand how everything interacts. But the building blocks of the world today interact with each other intensively and sometimes unnoticeably. And clearly, it is hard to follow every lead to calculate every interaction's influence. I mention this because in macroeconomics many effects can cause secondary effects and these secondary effects may also cause tertiary effects, so it seems to me like an unending loop.

Thus it seems to me that in macroeconomics we use statistics to find associations and then try to explain certain associations using intuitive notions (maybe a dominant underlying reason) given the results. It seems to me that results in macroeconomics cannot be rigorously argued like the ones in mathematics or even physics. Rather these results are merely approximations learned from the past which are not confirmed each time like the laws in physics, let alone mathematical theorems.

So is what I am saying correct or is it simply that I do not understand macroeconomics enough?

At the very foundation of sciences like Physics, rest relations and properties that they just are, no explanation can be given, but they have been found directly or indirectly to continue to hold, or at least to change at an inconsequential rate compared to the time-span (or space-span) of humans.

Moreover, although Physics laws are also idealizations of reality (and they hold under "normal circumstances", too, as regards for example temperature or pressure), it has been found that a) "normal circumstances" abound, b) these idealized versions suffer negligible variation in the real world for any of (or most) practical purposes and c) what happens under "special circumstances" is also stable, a complementary law in essence.

For Mathematics, the foundations are also arbitrary, but not being of this world but purely mental concepts, they can be whatever we define them to be -no reality will come crushing in to refute them (it is a different matter when we want to map abstract Mathematics to the real world).

In the Social Sciences, to which Economics belongs, the foundations contain relations and properties that have been found to change over time and over space, at rates much higher than physical properties change, and certainly within the time-span and space-span of humans. Plus, the observed variation around their idealized formulation is much larger.

This is what makes Social Sciences much more treacherous and harder than the Hard Sciences, and this is why progression towards more universally valid results is so much slower, or even, the arrival at a bouquet of results for which we will know with enough certainty to which observed relations do they correspond.

  "It seems to me that results in macroeconomics cannot be rigorously
  argued like the ones in mathematics or even physics."

Results in Economics can be fully rigorously argued, ever since Economics adopted mathematical symbolism to express itself. The issue is not with the process of argumentation, but with the premises one starts from.


Timing of Nature Drawing Types Consider a simple static, incomplete-information entry game.
 Two players, $i=1,2$. where player $1$ is new entrant, and $2$ is incumbent.
 Player 2 can be two types: rational or belligerent, with common prior $(p,1-p)$ over her types.
Action set: $A_1=\{Enter, Out\}$, $A_2=\{Fight, Accomodate\}$

When we turn this extensive form game into normal form, we compute the expected payoff for each pair of strategies $(x,zy)$ where $x$ refers to what player 1 chooses at the information set, and $zy$ refers to what player 2 chooses in case of each type.

My question:
 When we make this incomplete information game into a complete-imperfect one, we introduce Nature and let her draw the type for player 2. However, she knows her type when she is called upon to move, so why do we calculate an expected payoff for player 2 when converting the game into an normal-form? Is this because when we collapse the extensive form into the normal-form, player 2's pure strategy set takes into account each type that she can be (rational or belligerent), thus she is also forced to calculate an expected pay off? I mean, for any pair of pure strategy set, you have to deal with two terminal nodes and their payoff, so it makes sense in this perspective, you need some sort of expected payoff calculation. But it seems odd that player 2 who supposedly knows her type also has to form expectation on her payoff.

My guess is the way strategy is defined in incomplete information is that it prescribes each type of a player what she should do if this is the type Nature draws. So, as long as the cardinality of type space is greater 1, any pair of pure strategy will force each player to face more than 1 terminal nodes (eg. $(Enter, (Fight, Fight)$).

It just sounds odd that all along, Harsanyi allows a player's type to be unknown only to other players, but in the end, no matter what, whether you have various types or not, the payoffs must be computed in expectation.

I suppose you have in mind a game that looks like this:

  she knows her type when she is called upon to move, so why do we calculate an expected payoff for player 2 when converting the game into an normal-form?

The fact that "she knows her type" and therefore has no need to calculate an expected payoff presupposes that the play has reach a particular information set for player 2. Formally, let $\theta\in\{R,B\}$ be P2's type. Her utility  conditional on her type being $\theta$ is
\begin{equation}
u_2(\sigma_1,\beta_2(\color{red}{\theta})\vert\color{red}{\theta}).
\end{equation}
where $\beta_2(\theta)$ is P2's behavior strategy at the information set associated with $\theta$ (i.e. the left decision node for P2 when $\theta=R$ and the right decision node for P2 if $\theta=R$). Here, no expected value is calculated since the uncertainty is resolved for P2.
In contrast, in the normal form representation, P2's utility is an unconditional one:
\begin{equation}
u_2(\sigma_1,\sigma_2)=\Pr(R)u_2(\sigma_1,\beta_2(R)\vert R)+\Pr(B)u_2(\sigma_1,\beta_2(B)\vert B)
\end{equation}
where expectation is to be taken.

The reason is that by converting an extensive form game into the normal form, the temporal aspect of the game is lost and everything is seen from the ex ante perspective.


What will happen to the reserves at the Fed? Banks currently have 2.7 trillion Federal Reserves that they hold at their Federal Reserve account. It's part of the monetary base and these reserves were created when the Fed purchased bonds in their QE program.

What will happen to these reserves? How will they get back to the Fed? How will they be retired and won't they have to be used to pay off the treasury bonds the Fed is holding?

http://research.stlouisfed.org/fred2/series/NONBORRES

That's a link to it.

Reserves are drained (destroyed) when the Fed sells the debt or allows it to be paid off.


Simple Econometric question From LLN, we have $\text{plim}  Y_n=\mu$. Now you have $W_n=Y^3_n$, what is the probability limit of $W_n$?

Please help me answer this and thank you!

The comments have the answer. Let $\{X_n\}_{n=1}^{\infty}$ be a sequence of iid random variables with $E(X_1)=\mu$ and $Var(X_1)=\sigma^2$ with $\mu,\sigma^2<\infty$. Define $Y_n=\frac{1}{n}\sum_{i=1}^n X_i.$ By WLLN, $\text{plim}Y_n=\mu.$ Since $f(x)=x^3$ is a continuous function, by the continuous mapping theorem, $\text{plim}f(Y_n)=\text{plim}Y_n^3=f(\mu)=\mu^3.$


Intuition: Why does perfectly elastic supply imply no producer surplus? Foreword: I ask NOT about the whole question; so I quote only the following part of the answer.
Source: p 153, Question 7c, Principles of Microeconomics, 7 Ed, 2014, by NG Mankiw
= Chapter 7, Question 6c, Principles of Microeconomics, 4 Ed, 2008, by NG Mankiw

... To take the most dramatic case, suppose the supply curve were
horizontal, as shown in Figure 12. Then there is no producer surplus at all. ...

From the graph, I see that perfectly elastic supply $\iff$ a flat supply curve
$\iff$ producer surplus := Amount received by sellers $-$ Cost to sellers $\qquad = 0$.
But please help me dig deeper than the graph, which I already understand and so ask NOT about. Intuitively, why is the above true? I seek only intuition; no maths arguments or formal proofs please.

If it costs you 50 cents a bag to make popcorn and you sell it for 50 cents a bag, you come out ahead by 0 cents a bag.


Question about Gilboa and Schmeidler "A Maxmin Expected Utility With Non-unique Prior" 1989 I have a question on  the proof of lemma 3.3: Let $g\in L_0$ satisfy $u \circ g = b$, $z\in Y$ satisfy $J(z)=0$ where $J$ satisfy lemma 3.2, and let $f=\alpha g + (1-\alpha)z$. Then $u\circ f = \alpha u\circ g + (1-\alpha) u \circ z$. It is then stated that $\alpha u\circ g + (1-\alpha) u \circ z = \alpha b$. This implies that $u \circ z = 0$. Why is this the case?

Notice, $z$ is in $Y$, and so it is a lottery. Lemma 3.1 uses the standard vNM techniques to identify $u: Y \to \mathbb{R}$. Now, $J$ is defined as a function from $L_0$ to $\mathbb{R}$, so the statement $J(z) = 0$ is via the natural identification between $Y$ and constant acts, $L_c$.

Condition (ii) of Lemma 3.2 says that $J(y) = u(y)$ for all $y \in L_c \cong Y$. So, $u(z) = J(z) = 0$, or, in the other notation, $u \circ z = 0$.


Decreasing interest rate effect on economy Central banks decrease sometimes the interest rate by saying this has positive effect on the economy and the development of countries.

One of the reasons is that it can be easier to do investments (business, government, etc.). Are there other reasons? And does somebody have deeper insights about doing this and the benefit of it?

(Of course there are also disadvantages and risk of doing this (but I am not interested in that for now))

There are many channels of monetary policy transmission. You could look that up more if you're interested. I'll point out some of them here.

Interest rate channel. This is pretty much what you mentioned in the question. The opportunity costs of borrowing money becomes cheaper, so private demand expands.
Asset price channel. With the lower rate, people find it more attractive to invest in other assets (as opposed to keeping money in the bank). The increased asset demand leads to an increase in equilibrium price, which increase wealth for those who are holding those assets, and more consumption due to the wealth effect.
Exchange rate channel. The lower interest rate would cause funds to flow out of the country (people searching for higher yield in other countries) causing the currency to depreciate. The depreciated currency helps exporters to be able to compete and export more.


Do products which are only produced and consumed locally contribute to GDP value? According to Wikipedia:

  Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a period of time, often annually or quarterly. Nominal GDP estimates are commonly used to determine the economic performance of a whole country or region, and to make international comparisons.

But what if a country has a product which is massively or at least moderately produced and consumed only locally, either for tradition or any other reason. And the exports of this product are non existent or at best minimum. In the case the exports are non existent, the international market value of this product would be zero, wouldnt be? Or does the national market value counts in this case? Also, if the international market exists but it's minimum, and most of the production can only be consumed localy, does all those unsalable products value contribute to the GDP value?

Yes.

1. You seem to believe that goods and services that are not exported may not be counted.

This is false. (Almost) all goods and services are counted, even if they are not exported.

2. The only exception is (intangible) services produced for one's own consumption.

Examples: Mowing one's lawn, making one's meals, and cleaning one's home are not counted in GDP.

Note that (tangible) goods produced for one's own consumption are counted in GDP. For example, the crops produced and consumed by a rural household are counted in GDP, even though they are not sold on the market.

(There is one exception to the exception, which is that housing services "generated" by one's home is counted in GDP.).


What is the actual paradox in the Paradox of Thrift? I understand most of the reasoning, but don't understand what the actual paradox here is, as I believe there can be up to three potential paradoxes:

individuals increase savings when they should be spending more to get out of the initial recession
an increase in individual saving actually ultimately decreases total savings
what benefits an individual (increased saving during a recession) actually makes the overall economy as a whole worse off.

I'm sure it's one of the three, as they were commonly repeated when I did some research on the internet, but can't quite make out which one it is.

The Wikipedia article has several different quotations over time, though I would state the claimed paradox as a variant of (2), possibly something like

  an increase in the rate of saving can lead to lower total savings

perhaps illustrated with a graph something like

which suggests that the paradox seems to depend on the the combined relationships between income and savings and between investment and output, together with some macroeconomic tautologies.  If the relationships were different, or if the tautologies did not cause changes in equilibria, there might not be a paradox


Cobweb theorem and rational expectation In the cobweb theorem it is assumed that the producers follow an adaptive expectation, however if the price they look to determine their production reflects all the available information at the moment, so this price is in the context of the efficient market hypothesis and therefore it is formed under the rational expectation.
What is wrong here?

In the basic "Cobweb Theorem", the assumption is that suppliers must decide now next period production, and that they assume that next period market price will be equal to current period market price.

$$p^e_{t} = p_{t-1} \tag{1}$$

Now, we know that if price follows a random walk without drift, then the above a priori assumed expectations formation hypothesis coincides with the Rational Expectations Hypothesis:

$$\text {If}\;\;\; p_{t} = p_{t-1} + u_{t} ,\;\;\; u_{t} \sim WN \implies E_{t-1}p_{t} = p_{t-1} \tag{2}$$

But in the cobweb model, the actual price process is determined endogenously, given the a priori assumption $(1)$: we assume $(1)$ and we let the equilibrium of the model give us the model-consistent price process.

Assuming linear demand  (say, with a white noise preference shock), and supply function we have

$$D_t = a-bp_t +u_t,\;\;\; S_t = \gamma + \delta p^e_t$$

Imposing market clearing (an additional assumption no less) we have

$$D_t = S_t \implies p_t = \frac {a-\gamma}{b} - \frac {\delta}{b} p^e_t +u_t$$

and applying the a priori expectations formation assumption $(1)$ we obtain

$$p_t = \frac {a-\gamma}{b} - \frac {\delta}{b} p_{t-1} + u_t\tag{3}$$

$(3)$ is the model-consistent price process here (i.e. given $(1)$), not $(2)$. Only in the case that $a=\gamma, b=-\delta$ do we get that the price process emerges as a random walk without drift and so that the expectations formations hypothesis used in the model coincides with the Rational Expectations hypothesis.

The price that suppliers use is the current market clearing price indeed. But how they use it (hypothesis $(1)$), does not "reflect all available information", which is embodied in $(3)$ which suppliers ignore.


Example of social choice rule that does not satisly the unrestricted domain condition Can any social choice rule that is not complete said to be violating the unrestricted domain condition? Could you provide an example of SCR other than Pareto dominance that is not complete or violates unrestricted domain property?

Can any social choice rule that is not complete said to be violating the unrestricted domain condition?

Yes.

  Could you provide an example of SCR other than Pareto dominance that is not complete or violates unrestricted domain property?

Let society consist of two individuals $i$ and $j$. Let there be exactly two alternatives $A$ and $B$.

Each individual has 3 possible preferences: strictly prefer $A$ to $B$, indifferent between $A$ and $B$, or strictly prefer $B$ to $A$.

Hence, there are 3 × 3 = 9 possible social preference profiles:

$i$ strictly prefers $A$ to $B$ and $j$ strictly prefers $A$ to $B$.
$i$ strictly prefers $A$ to $B$ and $j$ is indifferent between $A$ and $B$.
$i$ strictly prefers $A$ to $B$ and $j$ strictly prefers $B$ to $A$.
$i$ is indifferent between $A$ to $B$ and $j$ strictly prefers $A$ to $B$.
$i$ is indifferent between $A$ to $B$ and $j$ is indifferent between $A$ and $B$.
$i$ is indifferent between $A$ to $B$ and $j$ strictly prefers $B$ to $A$.
$i$ strictly prefers $B$ to $A$ and $j$ strictly prefers $A$ to $B$.
$i$ strictly prefers $B$ to $A$ and $j$ is indifferent between $A$ and $B$.
$i$ strictly prefers $B$ to $A$ and $j$ strictly prefers $B$ to $A$.

We say that a social choice rule (SCR) is complete or satisfies the unrestricted domain condition if it maps (or assigns) each of the above 9 profiles to a preference. (A trivial example of such a SCR is that which maps each of the above 9 profiles to the preference "strictly prefer $B$ to $A$".)

A trivial example of a SCR that is incomplete or violates the unrestricted domain condition is that which maps each of profiles 1–8 to the preference "strictly prefer $B$ to $A$", but fails to map profile 9 to any preference. (Another trivial example is @Giskard's: The SCR which fails to map any of the 9 profiles to any preference.)


Why is the purchase of assets not entirely tax-exempt in the year of purchase? I'm a sole proprietor who has bought some assets for my business, like a chair. My accountant told me that I can't claim the entire price as a business expense in the year I incurred it, and instead have to depreciate it over 10 years.

Depreciation seems equivalent to paying more tax than otherwise, and getting a repayment from the government every year for a decade. I see several disadvantages with this:

It ties up my working capital. At the margin, this prevents some investments being made that would otherwise have been made, and bankrupts some businesses.
A rupee paid to me a decade later is worth far less than a rupee today, so this is effectively a hidden tax.
It makes tax accounting more bureaucratic, since I now have to track all assets and depreciate them over many years at different rates. This takes my time away from running my business. And makes me a hire a CA, wasting more money.

Why do governments subject assets to depreciation for tax deductions? Is there some fundamental reason I've missed?

In theory, income taxes tax "wages", "salaries", and "net income".

The design of a tax system is an important political issue.  A good tax system will raise the amount of revenue that the government "needs", and seem fair to both most of the people who vote, and to the people who pay most of the taxes.  If the tax system does not seem fair to the voters, the legislature is likely to be thrown out of office.  If the tax system does not seem fair to the tax payers, the government will have a difficult time collecting the taxes.

There are countries that tax dividends from businesses, but not the profits of businesses that stay reinvested in the business.  There are countries that tax the profits of businesses, but don't "double-tax" the dividends from businesses.  And there are countries that tax both the profits of businesses, and dividends from businesses.  It sounds like you are in a country that thinks it is fair to tax business profits, but does not think it would be fair to pretend that the assets used up by a business are free.

Anyone designing a tax system needs to think about how someone could "game" the system.  If it is possible for business owners to figure out how to not pay any taxes, some of them will.  If none of the business owners pay any taxes, the voters will notice.

Suppose you could re-invest all of your profits in physical assets for your business, and those assets retained most of their value for a long time. (For an extreme case, imagine that you bought a chair made of gold, and most of the value of the chair was the gold.) If you could deduct the full cost of the purchase immediately, then you could avoid all taxes on your profits. This would make the tax system seem unfair to most voters (who earn wages and salaries, not business profits.)

Thus, most governments choose a compromise.  By letting businesses "depreciate" physical assets over the assets over their estimated useful lives, the governments recognize that the decline in the value of the assets is a cost of doing business.  This does not seem completely unfair to most businessmen.  This compromise means that most business people wind up paying some taxes, which makes the system seem fair to people who are paying taxes on wages and salaries.

In theory, "depreciation" is supposed to approximately match the decline in value of an asset due to your business' use of it (or due to the time you hold it, because your business might need it). In theory, you only put up with the decline in value of the asset because the asset helps your business make money in other ways. Thus, the "depreciation schedule" is supposed to match up the cost (of the declining asset) with the revenue (at each time in the future) that it should help you earn.  In theory, the total amount that is allocated adds up to the total decline in the value of the original asset.  If you invest wisely, the incremental revenue you gain (because of the asset) should exceed the cost of the asset.  In theory, the incremental revenue you gain per period (because of the asset) might be proportional to the depreciation per period.

In practice, there are lots of fudge factors.  Many investments are a waste of money.  Other investments are spectacularly good.  Sometimes you can figure out which investments were good in hindsight.  Some things wear out faster than expected, or need to be replaced for unrelated reasons.  Other things are useful (and perhaps even valuable) indefinitely.


What does it mean for a technology to have a $|\rho|<1$? Nowadays, when trying to model (log)technology $a_t$, I've seen many times the following: $a_t = \rho a_{t-1}+\epsilon$, where epsilon is given a certain probability distribution. What does it mean for $|\rho|<1$? I know that in this way, the time series is stationary. My question is related towards more the interpretation. With such a $rho$ does this mean that our technological discoveries are being lost in time? We're forgetting our past? or That the discoveries give a surge of increase in 'productivity', but then the 'productivity' decreases...

Any help would be appreciated.

New technology makes past technology obsolete. How many people know these days how to light a fire by rubbing wood together? How many people know the nuts and bolts of tending to the engine of a train powered by coal? Heck, how many coal-trains are still operational?

So yes, we do forget our past discoveries and technologies, as they are replaced by new ones. But the technology as inserted in the production function, operates as a production shifter, a "mark-up", it does not represent the composition of technology, but rather its final effect on the production inputs.

Modeling the technological production shifter as a stationary auto-regressive scheme (without drift), we essentially assume that, random shocks aside, we are set today to produce less efficiently than yesterday.

Does this accord with observed reality? Do we depend on positive random discoveries to produce more efficiently? My impression is that, on the contrary, humans very purposefully try to make their production processes more efficient.

Now, if you were to add a drift (a constant term) in the log-technology process,

$$a_t = \delta + \rho a_{t-1}+\epsilon_t$$

you would capture, the rising trend in efficiency we have observed historically, and also implicitly, the fact that we discard old technologies.
This also has the benefit that it envisions rising efficiency while also, an eventual level-off (which seems wise to me).


Why aren't open market operations a zero sum transaction? I know that when the Federal Reserve buys Treasury bonds it increases the money supply, but I don't understand the process behind it. The model that I have given below (which is my best understanding of open market operations) is wrong and I need help understanding why.

  Suppose the US Government through the Treasury issues a \$100 bond with a yield of \$110. A third party purchases the bond and later sells it to the Federal Reserve for $105 during open market operations. Before the maturity date, the balance of the US Government is \$100, third party \$5, and Federal Reserve -\$105.
  At the maturity date, the balance of the US Government is -\$10, third party \$5, and Federal Reserve \$5.

This model erroneously depicts a zero sum transaction and not an increase in the money supply.

When we talk about the money supply, we are often referring to credit that is circulating in the economy at a moment in time. In other words, the more assets the Federal Reserve takes on, the more the money supply will increase at that moment. Indeed if the Federal Reserve decided to reduce its balance sheet by letting treasuries mature and the US treasury absorbed an equivalent amount in taxes to pay off its debt, the money supply will shrink back to where it started before the government issued those treasuries. But that will be far into the future if it even ever happens, and so for the present time open market operations do nominally increase the money supply.


Why are there (still) coins? I find coins extremely inconvenient to carry and count. I feel I'm not the only one to find them annoying and inconvenient.

What are some economic reasons why all cash money isn't paper and coins still exist?

In 2013 researchers at the Federal Reserve Board published a paper {link} considering the costs and benefits of replacing \$1 bills with \$ coins.
Here are the takeaways from their executive summary: compared to notes, coins offer

Less payment system efficiency. Using \$1 coins instead of \$1 notes for transactions is inherently inefficient, requiring a replacement of one \$1 note with more than one \$1 coin to make up for the difference in the way coins and notes are used by the public.
Less cost-effective. Replacing \$1 notes with \$1 coins is also not cost-effective for the U.S. government and public more broadly, primarily because the higher cost to produce coins compared with notes is not offset by the longer life of the coin.
Higher costs under all projected scenarios. Circulating only \$1 coins costs more under every scenario we considered (in net present value terms) than would continuing to provide $1 notes to the public.
Increased costs to the private sector. Circulating only \$1 coins could result in increased costs to the private sector, perhaps in the hundreds of millions of dollars per year, and would more than offset any "seigniorage revenue" to the government reported in earlier GAO studies.

So the case for using coins is indeed weak. But reading the paper in more details offers some clues as to the historic reasons why coins are so widespread.
For example, low denominations tend to be used quite frequently in day to day transactions, meaning they wear out much faster. The UK, Canada, and Australia all replaced their equivalent of the \$1 bill with a coin in the 1980s. But this was at a time when electronic payment mechanisms (such as credit/debit cards) were not widely available, meaning many small transactions used the low denomination currency with high frequency. This lent an advantage to coins' high durability that is less important today.
Indeed, one of the historical advantages of coins has been their extra durability, which makes them cheaper to maintain in the long-run. But the FED report notes that the durability of notes has increased significantly. When the UK replaced its £1 note with a coin, the lifetime of a note was 10 months (many of the original coins are still in existence 30+ years later). But a 2012 \$1 bill has an expected lifetime of 70 months, tipping the economics of coins vs notes decisively in the latter's favour. Many countries are now adopting polymer (i.e., plastic) banknotes that have yet better durability.

In sum, notes appear to dominate coins both economically and practically (at least around the \$1 denomination value). Various countries have also eliminated lower denominations from their coinage altogether (see Wikipedia).
But there are costs involved in replacing coins with notes. The state must retool its currency production, provide public awareness campaigns, and administer the process of currency replacement; the private sector must modify vending machines, cash dispensers, and similar appliances, and incur other costs implied by the transition.
For example, The Guardian reports that it was cost up to £50m to replace just the nation's parking meters as the UK undergoes its switch to a new design of one pound coin. Another estimate is that it will cost £40-50 for each changing room locker that needs to be upgraded. A treasury estimate put the cost of introducing new 5p and 10p coins in the UK to the coin-operated industry at £80m.
These costs, along with general inertia and the fact the people increasingly avoid using cash altogether are probably the main reason why we still have coin currency.


Opportunity Cost effect on benefits My question is the following:

Let's say a person has two career choices. He would be succesful in both, but in one of them he is slightly better and thus he will do better. So let's say career A will bring him a utility of 10 and career B a utility of 9.

So career A will bring him a 1 net utility benefit, due to the opportunity cost of 9 of pursuing career B.

Now suppose that for whatever reason, career B is not a choice anymore for him.

Is he now better off, from the fact that his net utility benefit is 10 and not 1? Why or why not?

If you measure how well off he is by his utility, then no. His utility is 10 in both scenarios.

The fact that career A is open to him increases his utility more in the second scenario than in the first scenario, this is what the "net utility benefit" shows you.