Stock-Flow Consistent models Stock-Flow Consistent (SFC) models are becoming more popular among heterodox economists (particularly in the Post-Keynesian school of thought). But I fail to see the relevance of this approach. The main addition seems to be the "construction" of the "Flow of Funds" table. But is that really necessary? Whenever an economist is doing a model, careful attention must be presented to including relevant sectors, and trying not to have "inflows/outflows" which are not explained in the system.

What is so special/new about SFC models? Are not most of mainstream models SFC? Even more, what if a model is not SFC, but is a better predictor/more realistic than one with SFC?

Marc Lavoie, page 265 of Post-Keynesian Economics: New Foundations: "In fact, the SFC  approach is perhaps a misnomer, as several other theories relate stocks and flows in a consistent way. The peculiarity of the post-Keynesian SFC aporoach is that its models truly integrate the real and monetary sides."

In other words, do not focus on the name "stock-flow consistent models," the (alleged) contributions go beyond stock-flow consistency.

The usefulness of SFC models depends upon your theoretical perspective.

If you are already a post-Keynesian economist, SFC models appear to offer a rigourous, standardised framework for setting up economic models. One of the problems facing post-Keynesian approaches is that there are considerable differences of opinion in how to approach economics, and the mathematical models used appear quite different.

The hope was that some of the distinctions might disappear if cast into the same mathematical framework. In practice, there remain considerable differences in the behavioural equations between various post-Keynesian schools of thought, so SFC models have not been able to completely unite the various schools of thought. (The text by Lavoie discusses this at greater length.)

If you are not post-Keynesian, the usefulness depends upon your views about mainstream macroeconomic models, which I will summarise as dynamic stochastic general equilibrium (DSGE) models here as a shorthand. Please note that there is a massive number of variants of DSGE modelling; my comments here reflect the views of an external observer who is not worried about the distinctions between those models.

(Since SFC models have an explicit economic model structure, they are not comparable to unstructured models that are generated by a statistical fitting procedurs.)

From a post-Keynesian perspective, DSGE models embed a great many assumptions, pretty much all of which have been criticised. For example, utility maximisation, the production function, rational expectations, general equilibrium, representative households, price determination, and even the distinction between randomness and uncertainty have all come under attack by post-Keynesians. (Since "DSGE models" vary, not all of these assumptions appear in all models. However, it is probably safe to say that almost all "DSGE models" incorporate at least some assumptions that at least some post-Keynesians object to.) SFC models do not embed those assumptions, and so have an advantage if you view those assumptions as incorrect.

However, even if you move past the arguments over the assumptions, the tractability of SFC models is an advantage versus pure DSGE models. Standard DSGE models have to make simplifying assumptions in order to remain tractable, such as not having a financial sector. Although certain DSGE models can relax such assumptions, what typically happens is that only some of them can be relaxed at once.

In practice, many central banks have had to use hybrid models, that only incorporate some behavioural equations taken from DSGE theory. Although it might not meet a purist's definition of a "SFC model", you could easily create such a hybrid model from a SFC model base. From the perspective of applied mathematics, I would be hard-pressed to give a formal mathematical reason why such a model is not a member of an extended family of "SFC models." (It would not be classified as a DSGE model, as there is no assumption of equilibrium. The behavioural equation is just a bolted on assumption, independent of equilibrium arguments.)

However, if you insist that macro models must reflect the optimising choices of households, SFC models are not going to help you very much.


Why is the money supply perfectly inelastic? From my notes:

We analyze the determination of the interest rate using a supply/demand model relating the interest rate (price of money) to the quantity of money. Since we assume:

1) no excess reserve

2) no excess currency in circulation

Real money supply (Ms/P) does not change with with a change in the interest rate, thus perfectly inelastic Ms

This is the part I don't really get. If money supply is determined by the central bank/government, does my notes have any connection to understanding why money supply is inelastic?

The Fed controls the nominal money supply as they are the only ones who can add or remove money from the economy by printing it. Real money supply is only affected by increases or decreases in inflation and is fixed assuming inflation is 0. In the IS-LM model which is what I assume you are referring to it is assumed that inflation is fixed or that the fed will maintain the real money supply at a given point by changing the nominal money supply for given price levels.

Graphically money supply can be shown like so:

The equilibrium between money supply (which is set by the fed) and money demand (which is set by economic factors) generates the interest rate for the economy at a given time. The fed thus has power to affect the interest rate by increase or decrease the real money supply in order to maintain an interest rate. Given that the fed has complete control over the interest rate under this model it is often assumed that LM is horizontal due to the fact that the fed can set whatever rate they choose regardless of economic factors.


Doesnt convexity prevent thick indifference curves aswell? It is standard in many micro textbooks when analyzing the relationship between preference axioms and the shape of the utility function (and consequently the shape of indifference curves), to attributed the "non-thickness" of indifference curves to "local non-satiation".
While it is easily seen (and proven) that LNS preferences don't admit thick IC, my question is the following:

Thick IC violate as well strict convexity (notice that weak convexity appears to "survive"), so, isn't convexity alone another property that prevents thickness? Put it differently, can we find non monotonic, convex preferences that don't admit thick IC?

If any proof or reference to relevant literature would be very useful.

My approach would be to define thick indifference curves in terms of a stronger form of local non-satiation:

  Definition (thick indifference curves) Preferences are said to have thick indifference curves if there exists at least one bundle $A\in\mathbb{R}^l$ and an open ball
  $\mathscr{B}(A)$ around $A$ such that $A'\sim A$ for every
  $A'\in\mathscr{B}(A)$.

Let's set up a definition for strict convexity to be sure we are on the same page:

  Definition (strict convexity) Preferences obey strict convexity if

  $$A\sim B\implies \lambda A+(1-\lambda) B\succ A\sim B$$

  for $A,B\in\mathbb{R}^l$ and any $\lambda\in(0,1)$.

Now we can state the desired result:

  Proposition If $\succsim$ is strictly convex then $\succsim$ does not have thick indifference curves.

Proof Suppose that $\succsim$ has thick indifference curves. Then there exists an $A$ such that $A'\sim A$ for all $A'\in\mathscr{B}(A)$. Thus, fix two bundles $A$ and $B$ such that $A\sim B$ and $B\in\mathscr{B}(A)$. We know that
$$\lambda A+(1-\lambda) B \in \mathscr{B}(A).$$
Thus, if the indifference curve is thick around point$A$ we must have $\lambda A+(1-\lambda) B\sim A\sim B$. But this contradicts the strict convexity hypothesis. QED

That should do the job for strict convexity. As frage_man already pointed out, the proposition fails to hold generally under weak convexity. Indifference everywhere is a very elegant example why.


Is the amount of tax that consumers pay the same as the amount producers pay? I am confused about the amount of tax producers and consumers pay.

On this diagram, I can see that the supply curve increases by twenty dollars, as the tax is 20 dollars. The consumers have to pay 10 dollars more from what they previously had to pay.

This confuses me a bit. Don't producers and consumers pay the same amount of tax? When I look at this, it seems like they pay a different amount. The consumers pay 10 dollars more, but the producers don't pay $10 more.

Tax is payed by the party it’s levied on, but I think your question is about tax burden and loss of consumer/producer surplus.

In this case both producers and consumers loose the same amount of their surplus, as you can calculate the lost area which is for both of them 40.

However, in real life this does not have to be symmetric. It depends on the elasticity of the demand and supply. As a general rule the more elastic demand the higher share of the tax burden goes on producers and the more elastic supply the higher share of burden is shifted to consumers.


Why New Zealand dollar keeps falling against USD and other currencies? New Zealand seems to have strong economy and governed well by the RBNZ. Agreed that recent decrease in the dairy prices globally has some negative effects on the economy. But with the large service sector of the country, why is the Kiwi dollar weakening against USD, GBP, AUD, etc. in recent months? Is the economy of the country really in a bad shape?

If you look at the NZD against the USD over the last 10 years, it looks like this:

Obviously there has been a pretty sharp decline lately, but it's still not that far below the 10-year average of 74.27. It's also interesting to look at how it's been doing against the Australian dollar:

As you can see, at 88c currently, the NZD is still well above its 10-year average against the AUD. Again, there's been a sharp dropoff of late -- NZD almost reached parity with the AUD quite recently.

In terms of why there has been a dropoff of late, I think you've hit the nail on the head regarding dairy prices. Dairy (including baby formula) accounts for a large share of NZ's exports, and dairy prices are at a 6-year low currently. Fonterra, the dairy exporter, is scrambling to restructure. That alone probably explains the majority of the NZD's recent decline against the AUD. I think the NZD decline more broadly against the USD is probably partially attributable to the weakness of the AUD -- New Zealand's economy has close ties with the Australian economy, and the Aussies have suffered from decreasing commodity prices. Also, it takes two countries to calculate an exchange rate, so when looking at the NZD's decline against the USD, you might note that the US economy has been doing quite well over the last few years (at least if you're naively tracking the DJIA or something).

Anyway, there's no need to panic about the NZ economy. Exporters benefit from a weak NZD. The tourism industry, another key sector in the NZ economy, benefits significantly from a weaker NZD also. If you're a Kiwi that likes to travel, and most seem to, the weak dollar isn't much fun, but such is life.


Competition and welfare - empirical evidence Consider the following claims:

less competitive markets deliver worse outcomes for consumers,
less competitive markets deliver lower social welfare,
less competitive markets deliver higher prices/lower quality.

These might be considered fairly canonical claims in the sense that they emerge naturally from many 'textbook' models from introductory economics or industrial organization. That means that many students of economics are exposed to such claims through the lens of theory. I would like to supplement this with empirical evidence.

I am looking for references to empirical work that supports or refutes one or more of the abovee claims (or close variants of them). Particularly welcome would be survey articles covering literatures that address them.

Here is a fact sheet by the OECD about the effects of competition. It is mostly concerned with growth and productivity, but also discusses the effects on poor consumers and prices. It cites a wide range of empirical studies that you might find of interest.

https://www.oecd.org/daf/competition/2014-competition-factsheet-for-print-en.pdf

OECD, Factsheet on how competition policy affects macro-economic outcomes, 2014.


Why must there be an equilibrium in the money market? Probably this question is a bit(or very) stupid.

I'm self-teaching by reading a book on macro, and the author states that in the Money Market, when the output increases the demand for money also increases, and given a certain money supply, the interest rate must go up to maintain the equilibrium. So, in this case, the Central bank(CB) would just sell bonds => diminish price of bonds=> increase interest rate.
My question is, why should this equilibrium be maintained? Isn't there a situation, when people may want more money to acquire/trade, but the CB just won't sell bonds?

Any help would be appreciated

In your textbook, it says that given a certain money supply, the interest rate must increase if the demand for money increases.

The money supply is determined by the central bank, which can buy bonds (which takes bonds out of circulation and increases the supply of money in circulation), or sell bonds (putting bonds in circulation but decreasing the supply of money in circulation). It can also, as in your example, do nothing.

If the demand for money increases, then market participants are willing to either "buy" more money at a given price (where the "price" of money is the interest rate), or pay a higher price for a given amount of money. This is true of all goods— and so long as demand isn't either perfectly elastic or perfectly inelastic, both are true.

So since in your example the money supply is fixed (i.e., the supply curve is perfectly inelastic), if the demand for money increases, the interest rate will increase. The interest rate increasing as a result of increased demand for money isn't dependent on the central bank doing anything, it's dependent on the central bank doing nothing.

In practice, central banks usually target a particular interest rate. When they do so, they can't directly observe the demand for money, but they can observe the equilibrium price (i.e., the interest rate). So what they do is engage in open-market operations— buying [or selling] bonds to increase [or decrease] the supply of money, in turn decreasing [or increasing] the interest rate until it is close to their target.


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

What are some other estimates?

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

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

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

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

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

The Economist adds an important caveat:

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

$$$$

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


Can there be sensible choice behavior that violates the Weak Axiom of Revealed Preference? Following the notation of Mas-Collel, Whinston, and Green, consider a family of budget sets $\mathcal{B}=\{\{x,y\},\{x,y,z\}\}$. To make the example concrete, let's let

$x$ be a book
$y$ be a left shoe
$z$ be a right shoe

For motivation, let's suppose the individual prefers going for a walk over reading a book. However, to go for a walk, he needs two shoes. If he can only have one shoe, then he would rather choose the book instead.

Thus when faced with Budget set $\{x,y\}$, the consumer chooses the the book: $C(\{x,y\})=\{x\}$. However when faced with all three alternatives, he chooses the shoes: $C(\{x,y,z\})=\{y,z\}$.

As we constructed it, this choice rule $C$ violates the Weak Axiom of Revealed Preference:

  Suppose there exists some budget set $B_1 \in \mathcal{B}$ with $x,y
 \in B_1$ and $x \in C(B_1)$. Then for any $B_2 \in \mathcal{B}$ with
   $x,y \in B_2$ and $y\in C(B_2)$, we must also have $x \in C(B_2)$.

In our case, since $C(\{x,y\})=x$, then WARP would require $x \in C(\{x,y,z\})$ since $y \in C(\{x,y,z\})$. However, it seems we were able to motivate a sensible reason why $C(\{x,y,z\})=\{y,z\}$.

Side note: I have left prices of the goods out of this story. (Hopefully this is acceptable; to be fair, MWG's chapter on choice rules doesn't mention prices either. (I assume we should imagine the price of these goods are all 0, or all the same price -- would that be the right way to look at it?)

This example brings me to the question posed in the title: Can we have sensible choice behavior that violates WARP?

I think that your example relies on a misunderstanding of the meaning of the choice function. $C(\{x,y,z\})$ does not contain the elements that the decision-maker would choose simultaneously if he could. He is only allowed to select one element at a time (otherwise, why not consuming all three items ?). Therefore $C(\{x,y,z\}=\{y,z\}$ does not mean that he selects both shoes. It means that, if you ask him to choose one element inside $\{x,y,z\}$, he might either pick $y$ or pick $z$, being indifferent between the two. In that case, your story would not make much sense, since the value of a single shoe would be the same in both choice sets.

Regarding your question, there are some well-known violations of WARP that rely on behavioral biases, in particular the attraction effect and the compromise effect. These expressions describe situations where the comparison between two goods is affected by the nature of a third (unselected) good in the choice set. You can easily find some references (experimental evidence, models) on these phenomena.


Wealth Creation: Where does the money come from? I'm trying to better understand wealth creation– let's use trade as an example.

I've bought a cup for \$2 and sold it for \$10. We've "created some new wealth" there– but without a net increase in actual dollars that exist, how has more wealth been created? Am I not just taking \$10 that already existed from someone who perhaps made it at their day job? Who's boss in turn took it from the sale of a bagel? Aren't these dollars that already exist?

How does this boil down into actual new wealth and money?

If we view "wealth" as the subjective experience of pleasure, then "wealth" can spring up ex nihilo: if people used to get two dollars' worth of pleasure from having a cup, but now they get ten dollars' worth, then in some sense eight dollars of wealth has come "out of nowhere".

However, it's more likely that at least one party has misvalued the cup. Perhaps the original seller was unaware that there was someone out there who would get ten dollars' worth of pleasure from the cup, or maybe the buyer has miscalculated how much pleasure they will get from the cup. In that case, wealth has not been created, it has simply been transferred to you.

A third possibility is that you have added value to the cup. Perhaps you own a retail store, and 2 dollars is the wholesale price while 10  dollars is the retail price. The person who paid 10  dollars for the cup doesn't want to buy in bulk like you do to get the wholesale price, and they don't want to deal with buying from the manufacturer. Maybe they bought a bunch of stuff from your store, and it would have been a lot of work to arrange purchases from all the different manufacturers. You've added to the end user's convenience, and therefore added wealth to the economy.

The issue of currency is a side matter. Currency is a measure of wealth; it isn't wealth in and of itself. If you had made the cup all by yourself, clearly you would have created wealth, even if no money changed hands. Money enables price signals to let other people know how much you value their activity, but that value exists independent of an explicit monetary figure been ascribed to it. If you create a cup and then sell it for 10 dollars, the wealth creation occurs when you make the cup. When you sell the cup, you are indeed not creating 10  dollars of wealth at that moment; it already has existed since you made the cup (however, depending on how one does the accounting, some of the wealth may be created when you transfer possession, if the person you sell it to has more of a use for it than you do, but it's the transferring possession, not the payment of currency, that causes the increase in wealth).


What is the relationship between the demand for loanable funds and investment? If the demand for loanable funds decreases, investment increases because the real interest rate decreases. Isn't that a contradiction, because loanable funds are used for investment, and a decrease in demand for loanable funds must come from a decrease in investment?

Assuming loanable funds are all used for investment, loanable funds = investment.

The interest rate can be though of as the price for loanable funds. Take a look at the following graph.

You can think of the change from point A to C in two steps, with B as the intermediary, even though in reality both steps probably happen simultaneously.

First the shift in demand from D to D2 (decrease in demand for loanable funds) is reflected by the move from A to B. Price has not yet changed at this point.

Then, a new equilibrium is reached with quantity demanded moving down the new demand curve (as price decreases) to point C. In this step price decreases so the quantity demanded actually increases. But it does not reach the quantity demanded at the original point A.

So as the demand curve shifts to the left both price and quantity demanded decrease.


How do I solve this Game Theory Bargaining problem? Let's say there are two players in a game. In the first period, P1 makes an offer to split 3 dollars with P2. P2 accepts or rejects the offer. If P2 accepts, they get the offer made by P1, and P1 gets what is left of the 3 dollars. If P2 rejects, then P2 makes an offer to P1 in period 2. P1 can then accept or reject the offer. If P1 accepts, then P1 gets the offer made by P2, and P2 gets the 3 dollars minus the offer they made to P1. If P1 rejects the offer, they both get 1 dollar. A discount factor of δ applies in the second period, i.e. one should consider 3δ dollars in the pot, and 1δ dollars as being the value of the outside option.

How do I find the Sub Game Perfect Equilibrium of this game?

So, we have to solve this game by Backward induction. We know if $P_1$ rejects the offer at the end note, both will get $P_1=P_2=\delta $. So, to make $P_1$ better off and make the proposal accepted,$P_2$ will offer $P_1$ an amount of $(\delta +\epsilon ) $, where $\epsilon \rightarrow 0$.(I'm considering the case of continuous prices or you can think of a $\epsilon =0.001$ i.e. a very small amount which just makes the $P_1$ strictly better off in accepting the proposal. So, $P_2$ will get $3\delta -(\delta +\epsilon )$ or $3\delta -\delta +0.001=2\delta +0.001$. Now, $P_1$ knows that if $P_1$ offers any amount $< 2\delta +\epsilon $( strictly less than), then $P_2$ will reject the offer. So, to make $P_2$ strictly better off, he'll offer $P_2$ an amount of $(2\delta +\epsilon + \theta )$, where $\epsilon \to 0,\theta \to 0 $ i.e. infinitesimal changes such as $\epsilon =\theta =0.001$. So, $P_1$ will get an amount of $(3-2\delta -\epsilon -\theta )$ where, $\epsilon ,\theta > 0$


Impact of hedge funds on economy I'm still kind of new to these things and some countries seem to be forbiding sharing more about hedge funds to casual people (at least what I understood from it), but anyway:

What is/was the largest hedge fund in the world and how big influence it had on economy (of any country):

during its existence
at its highest peaks
when it started to fall down?

Asking just of pure curiosity as a person needs quite large amount of money to at least enter such fund, which I guess will cause some change in the economy, right?

To answer the specific question, I believe the largest hf in the world is Bridgewater (assets under management of around 120bn USD). Assets of around 500m USD would be considered average and north of 1bn usd large. Bridgewater is an outlier. I do not know if one larger has ever existed but I doubt it.

As to what effects they have on the economy well, funds can serve as catalysts for economic events (e.g. Soros' fund and others catalysing the UK exit from the ERM). They serve as vehicles for pooling and allocating capital and so act as intermediaries between those who wish to lend (investors in the hedge fund) and those who wish to borrow (firms issuing bonds etc. which the hf buys). This function only applies when the hedge fund is making a primary investment though - when it is buying something in the secondary market rather than a first issuance funds do not have this role. They largely determine things like commodity prices, exchange rates through the bulk of money they control together, although no hedge fund is large enough to control these markets directly.


Can banks 'create' money on their own or do they need help from other banks? My current understanding of the banking money multiplication process goes as follows: Alice comes along and deposits 100 cash into Bank A. Bank A gains 100 in vault cash (reserves) as an asset and 100 in liabilities in the form of Alice's checkable deposit. Bank A then loans out 90 (they cannot loan more since RR=0.1) and so the banks asset are 10 reserves and 90 loans and everything balances. The individual who gets the loan from Bank A takes the 90 and deposits in say Bank B and the multiplying process continues until total nation-wide deposits=10*reserves=$1000.
But now my textbook (Mishkin) states that

Because a single bank can create deposits equal only to the amount of its excess reserves, it cannot by itself generate multiple deposit expansion.

He then goes on to say that

A single bank cannot make loans greater in amount than its excess reserves

as well as

the banking system as a whole can generate a multiple expansion of deposits, because when a bank loses its excess reserves, these reserves do not leave the banking system, even though they are lost to the individual bank

But this doesn't make sense to me at all. I see no reason why Bank A in my earlier example is not able to multiply deposits all on its own. Say that in my example, the original 90 loan goes out to Bob to finance one of his business endevours. Bob does not want 90 in cash so instead he opens up a checkable deposit account at bank A and so bank A's reserves go back to 100 with 90 in loans and now they have deposits =190 . Clearly they have excess reserves. So they now make another loan to Mary equal to to 81 who then also does not wish to hold cash and so she stores the money in a deposit account at bank A. This process then repeats as Bank A makes loans and each borrower gets a deposit at bank A until bank A has 100 in reserves, 900 in loans and 1000 in deposits.
Thus Bank A, a single bank, has generated multiple deposit expansion. But Minkish seems to say this is only possible if the borowers deposit their money in other banks instead of the original lending bank. So is he wrong or am I wrong and missing something here? Any help on this would be most appreciated!

The question in the title is actually a bit broader than the question in the body, I will try to answer both questions starting with the one in the title.
Answer to Question in the Title

Can banks 'create' money on their own or do they need help from other banks?

Yes, banks actually can crate deposits on their own without help of other banks, thanks to getting excess reserves in the interbank market or from central bank. For example, you can have look at McLeay (2014) Money creation in the modern economy which explains that in greater detail, and it will likely be covered in later chapters in the textbook unless it is old one (or you can have look at other textbooks such as Blanchard et al Macroeconomics a European Perspective).
Answer to the Question in the Body
In the body your question is about whether single bank can increase money supply within the money multiplier model. There the answer is no.
The multiplier model is one model of money creation that applies under certain circumstances, such as when central banks decide to exogenously control money supply by changing quantity of reserves (although the money multiplier exists in multiple models usually when people talk about money multiplier they talk about the simplest exogenous supply of money model). But the multiplier model won't hold (save for special cases) when the central bank conducts its policy through setting interest rate and supplying amount of reserves that is demanded.
This is because if there is only single bank it won't be able to create more reserves out of new deposits For example, let us assume that single bank starts with 100 reserves (R), which are assets  and 100 deposits (D) which are liabilities. The ballance sheet of such bank will look like:
  Bank A
   A | L
 -----------
100R | 100D

Now if bank issues a loan that means that it is converting some of the reserves to a loan. If a single bank would issue a loan and the person would kept the loan with the same bank then the balance sheet would look like this:
  Bank A
   A | L
 -----------
 10R | 100D
 90L |

And bank would not be able to lent any more money as with 10% reserve ratio it would already issue the maximum amount of loans it can make as it has no more excess reserves to lent out. However, the 90 loan that exists the bank can then become a reserve for a new bank, so for bank B the balance sheet would look like:
   Bank B
   A | L
 -----------
 90R | 90D

Hence now that original 90 loan became new 90 reserve and that would not happen if the original bank would just keep the money. Now the new bank can further break the 90R into 10R and 80L and so on.
Now as mentioned in the first paragraph the above won't hold in practice as even single bank nowadays can support more lending by getting excess reserves from other banks  or when central bank is willing to supply additional reserves instead of just setting the quantity reserves from the get go. Nowadays central banks mainly change the price for reserves (i.e. the interest) not amount of reserves. In that case that single bank can just increase the amount of R to create new loans (and matching deposits). However, even that is currently no longer the case because reserve requirements were dropped by Fed in 2020 so now banks can lend as much as they can (at least in US and other countries).
The multiplier model is a simplification that is mostly used as an introduction to money creation since it is an exogenous money supply model and those are easier to solve and learning the more nuanced endogenous money supply model is easier after learning the exogenous one. I am not sure to which Mishkin textbook you refer to, but I would be surprised if in later chapters it would not cover endogenous money supply models (money multiplier is an exogenous money supply model). For example, textbook by Blanchard et al. covers endogenous money supply model right after money multiplier, unless the Mishkin textbook you refer to is very old (prior 2009) it will likely cover it as well in subsequent section.


Macroeconomic policies and trade balance Which of the following policies does not contribute in lowering the trade deficit?

a) the increase of government expenditure

b) growing the internal interest rate

There is only one correct answer, but I fell like both of them are wrong. Can someone help me with an argument?

In a small open economy specifically (as opposed to a closed economy, which does not trade with other countries, so $NX$ is not considered) , the the real world interest rate is not effected by the economy increasing its internal interest rate. As consumers can simply turn to the world market and get funds at a lower interest rate if the internal interest rate increases greater than the world interest rate. However an increase in government expenditure will increase the trade deficit.

Note that Net Exports equals Net Capital Outflow. This can be visualized mathematically:

$$NX=S-I$$

Where: $S=$ National Savings $= Y-C-G$.

This means that as Government expenditure $(G)$ increases National Savings $(S)$ will decrease. Thus resulting in a greater trade deficit.

Therefore, It is of my humble opinion, based on the question, it seems that an increase in government expenditure will not assist in lowering the trade deficit.

Hope this is helpful.


What is the difference between average cost and marginal cost? $$AC(q) = \frac {C(q)}{q}$$
$$MC(q) = \frac{\partial C(q)}{\partial q}$$

These are the definitions. But I don't understand what the difference is.

Is the average cost the cost per unit while the marginal cost is about infinitesimals?

The average cost is the cost on average: total costs (C) divided by total number of units of production (q). Just as the equation you gave, says

The marginal cost is the cost at the margin: the additional cost of one extra unit of production, just as the equation you gave, says. Most goods and services come in discrete units: in those cases, it is not about infinitesimals, it is about the last unit of production, the unit that was produced to meet demand, the unit that would not have been produced had demand been one unit lower. In cases of continuous supply, the marginal cost is the gradient of the curve of total cost plotted with respect to total supply.

In pretty much all real-world circumstances, marginal cost is generally greater than average cost: that's guaranteed by a strictly monotonically increasing supply curve (with the trivial exception of the first unit of production, where average cost is by definition equal to marginal cost).


Trying to show result of prisoners dilemma simulation through supply/demand graph I made up this situation where candidate $A$ and $B$ are vying for a job. They can accept wage $x$ or undercut this to agree to work for $x-k$ where $0<k<x$. My point was that eventually they kept undercutting because they didn't want to get beat out of a job and thus they ended up being paid $0$ (evol. of internships).

I tried to show how this looks in a supply and demand graph with the equilibrium being $0$ but it wasn't making sense to me. Is it illogical to try to connect the two?

Here were my thoughts:
If we had labour supply (employees) and labour demand (employers), and then the price employees are willing to work for decreases so the supply curve shifts to the right. But then this would make employers want to hire more people which would make the demand curve shift up to the right. If this keeps repeating how would we get that people are working for a price of $0$? And then it also doesn't make sense that if they're working for less the quantity supplied is greater. Or does it?

Very confused!

All right, first some initial thoughts:

You don't really need game theory for this, although you could.
Take it to a multi-person level and basically what you have is
simple competition.
Unless there is some other motivation to
take the job (for example because one is required to do an
internship and it's one of the only ones offered) you would not
compete to 0, but to your reservation wage, below which you would
refuse to work at all. Of course you can always say that you've
normalized the reservation wage to 0. Moreover, the reservation wage is not the same for everyone because we have different alternative opportunities, typically.
If there is an other reason to take the job, as e.g. with the earlier mentioned internship, there is no reason why competition could not drive the wage below 0, that is people will actually pay to take the job if they want it bad enough.

As for your question in principle nothing happens to demand (in the short-run); only the quantity demanded changes. Suppose before the game is played we have the initial situation like this:

The staircase function is the supply of laborers, the dotted function the demand. In this situation person 1 is willing to work at wage=1, and person 2 at wage=2. In principle in this case the firm would hire person 1.

Now the game is played and person 2, undercuts person 1, who will undercut person 2 in turn etc.. What this does is bring the staircase steps down until they are all aligned at 0 like this:

The supply curve becomes a horizontal line at 0. The quantity demanded for the number of laborers changes from 1 to 2.

In a model involving more people that all have the same reservation wage the supply curve would look like a straight upward-sloping line and competition would induce the supply curve to turn until it is horizontal at the reservation wage.

Why does that not happen in real life? Given that typically everyone has not the same reservation wage because they have different outside options, people do drop out of the competition earlier and the supply curve stays an upward sloping line.


Measuring and assigning utility numbers I was recently introduced to the concept of cardinal utility. In real life, how do we assign these utility levels? For example if i wanted to assign numbers to my own utility indifference curve for two things, how would i go about it? What happens if one of the things is not exactly measurable in terms of quantities on an individual level? For example lets say the two things i am considering are convenience of traveling by car to air pollution, then how would i go about it?
I have tried to look on the internet and i have come across some techniques like time-trade off, but these are mostly used in measuring health related aspects which can still be imagined/estimated in mind. This is related to a project, so i am looking for simple feasible methods that i can use to estimate my own preferences, and not something complex like neuro imaging etc

There are no simple methods for estimating cardinal utility (ordinal utility would be a different matter - you could just observe few of your choices).
This is not because cardinal utility would necessary be unmeasurable.  Although this is not completely settled question (see Moscati (2018) Measuring Utility: From the Marginal Revolution to Behavioral Economics), if you are willing to buy into the von Neumann-Morgenstern (1944) derivation of cardinal utility, then the cardinal utility is measurable.
According von Neumann-Morgenstern (1944) cardinal utilities could be measured in principle since by the axioms of von Neumann-Morgenstern (vNM) cardinal expected utility you should, in principle, be able to measure it.
According to vNM assuming that axioms of completeness, transitivity, continuity and independence  are satisfied (see von Neumann-Morgenstern (1944) Theory of Games and Economic Behavior), there is some function $u$ that assigns to each potential outcome of a gamble $X$ a real number $u(X)$ such that for any two gambles ($X_1, X_2$):
$$X_1\prec X_2 \qquad \text{iff} \qquad E(u(X_1))<E(u(X_2))$$
Consequently, $u$ can be uniquely determined, and be fully measurable, by measuring preferences between some simple gambles (e.g. gambles such as  $pX_1 + (1 − p)X_2$). However, to measure the cardinal utility in full you would have to run infinite number of such gambles (even with just two outcomes $X_1$ and $X_2$ you can construct infinite number of different simple gambles). In addition those have to be real gables with stakes not just 'made up' gambles as otherwise you can never be sure if in real situation you would choose completely differently.
A potential proxy for measuring cardinal utility could be willingness to pay. This could be considered a proxy for some cardinal money-metric utility function but even that approach has some issues (Fleurbaey, M. 2011). However, this is probably the most practical approach. This is also reason why willingness to pay is so widespread in the cost-benefit analysis in public economics. However, even with this approach you will have to do some serious data collection on various purchases you make and other control variables such as your income for example.


Why is it important to look at all three different ways when looking at the macroeconomy of a country? we have and use three different ways of deriving the Gross Domestic Product namely Output, Income, and Expenditure (or final consumption) methods but why is it important to view the GDP from all three perspectives? what purpose does it serve? and how does it help macroeconomists, policymakers? how is it helpful?

It would be great if you could offer a detailed explanation. I am so thankful for your efforts. God bless!

These are three ways of calculating GDP - all of which in theory should sum to the same amount. Each of these approaches looks to best approximate the monetary value of all final goods and services produced in an economy over a set period of time (normally one year).

The major distinction between each approach is its starting point. The expenditure approach begins with the money spent on goods and services. Conversely, the income approach starts with the income earned (wages, rents, interest, profits) from the production of goods and services.

Sources:

https://www.tutor2u.net/economics/reference/measuring-national-income-gdp
https://www.investopedia.com/ask/answers/070715/how-do-you-calculate-gdp-income-approach.asp


Conversion of GDP PPP International \$ 2005 into GDP PPP International \$ 2011 Essentially I have two different datasets that I'm trying to consolidate. One set of data comes from the World Bank Databank, and is a set of historical GDP PPP values for all countries expressed in 2011 international \$. The other dataset is a set of forecasted GDP values for all countries, and is expressed in GDP PPP expressed in 2005 international $. I would like to convert one of these sets into the same units as the other.

Is this possible? If so, how would I do this?

The latter dataset has some historical values, so I've tried dividing the 2011\$ by the 2005$ for different countries, but have found that the ratio is different in all cases.

Eg.

China - GDP 2008 in \$2005: 7,566.755billion;  GDP 2005 in \$2011: 10,437.906billion - Ratio: 1.38

Canada - GDP 2008 in \$2005: 1,197.757billion;  GDP 2005 in $2011: 1,383.398billion - Ratio: 1.15

I do not know where you got the forecasts for GDP, but it is very likely they do not include a forecast on how PPPs are changing. As such, a computation of the rate of growth of GDP in 2005 PPP is a mreasure of real GDP growth.

Hence, what you want to do is to concatenate two series. For this, take the latest GDP level of each country from the World Bank series in 2011 prices, and extend it using the forecasted GDP growth rates in 2005 prices, calculated from your database of forecast. Naturally you only want to forecast GDP for the years that are missing in the World Bank database. The reliability of this exercise depends on how outdated the forecasts from the 2005 database are.


The Great Depression vs The 2008 Financial Crisis So I'm taking this finance course and my professor keeps talking about how the 2008 financial crisis was worse than the great depression.

I have my doubts so my fellow economists, do you think the 2008 financial crisis was worse than the great depression?

2008 was a recession. 1929 was a depression. Simple as that. Unemployment rates did not hit 20% in 2008. People were literally starving in 1929. Big difference.


Questions about the future of macroeconomic modeling and the role of simultaneous equation systems I started to study about macroeconomic modeling and I am interested in the following questions. I understand that there are no definite answers to these questions. But I am interested in the opinion of local experts.

Is there a future for DSGE models after the 2007 crisis?

Will DSGE models be replaced by agent-based models?

Does it make sense to study and use in practice the econometric systems of (simultaneous) structural equations after Lucas critique in today's realities?

I would appreciate a reasoned answer and a constructive discussion.

Is there future for DSGE?

Well, DSGE stands for dynamic stochastic general equilibrium models. You can’t really model time series appropriately without the dynamic stochastic part, and when it comes to general equilibrium there are economists who think that this approach does not really capture all interesting questions, as in many cases it might be more interesting to see what happens when economy is in transition between equilibria. But I don’t think in mainstream macro DSGE will be gone any time soon.

However, this does not mean that the DSGE models are not being improved or changed. There is a lot of research trying to include more heterogeneity, for example in agents expectations (see this paper) or imperfect information (see here) and I recall seeing at a conference some models that try to add behavioral micro foundations to the DSGE.

I don’t want to make long term forecasts because they are inherently inaccurate- but as I see it DSGE will be here at least for next 10 years and I would not be surprised if it would be longer.

Will DSGE be replaced by agent based models?

Well this is hard to say (assuming you are talking about agent-based computational (ACE) economics - since there can be agents in DSGE as well). So far the research on AEC is mostly very recent so it’s hard to judge the literature. It’s definitely possible they would eventually replace DSGE but on the other hand AEC has its own methodological problems (see here - although also note that the paper is mainly criticism of DSGE but it contains also some useful info on potential pitfalls of AEC). It’s also not impossible that both approaches will be used concurrently in the future.

Does it make sense to use simultaneous equations?

Yes, it does not just make sense it’s a necessity if you make any analytical model of macroeconomic activity. You need to use simultaneous equations if your system is endogenous to properly describe it and in macroeconomics most variables are well known to be endogenous.

I also don’t see how would this be affected by “today’s realities”. It’s not like let’s say income was endogenous in 90s but stopped being endogenous in 2007 or 2019.

Even ACE tries to model endogenous interactions, so there is implicit simultaneity in them. So that’s not even an issue here. The only reason why ACE models are not technically simultaneous equations models is that most of them don’t include any explicit analytical expression but are performed via Monte Carlo simulations or some set of if then statements or some other computational approach.

You could only say that simultaneous equations don’t make sense in macroeconomics only if you want to claim that either macroeconomics systems are not endogenous or that macroeconomic systems can’t be described by analytical expressions (or both). I think you would have serious trouble finding credible economist that would get behind any of these. I think even most ardent AEC proponents would not dispute that theoretical macro models based on simultaneous equations are useful to get intuition or “deeper knowledge” behind macroeconomic variables and relationships between them.


Unemployment Rate Volatility Is there a statistic that describes the “churn” in the unemployment rate i.e. how many became unemployed compared to how many found work?

I’ve heard of unemployment volatility (https://www.emeraldinsight.com/doi/abs/10.1108/03068291211224937) but never could find any stat for it in the U.S.

For a better idea of what I’m talking about, here is an article written about it in India: https://www.cmie.com/kommon/bin/sr.php?kall=warticle&dt=2017-10-31%2009:43:08&msec=273

Does the BoLS track this metric?

The U.S. Bureau of Labor Statistics (BLS rather than BoLS) publishes the results of its Job Openings and Labor Turnover Survey (JOLTS)

For example, its summary news release for May 2018, published on July 10, started with:

  The number of job openings edged down to 6.6 million on the last business day of May, the U.S. Bureau
  of Labor Statistics reported today. Over the month, hires and separations were little changed at 5.8
  million and 5.5 million, respectively. Within separations, the quits rate and the layoffs and discharges
  rate were little changed at 2.4 percent and 1.1 percent, respectively. This release includes estimates of
  the number and rate of job openings, hires, and separations for the nonfarm sector by industry and by
  four geographic regions.


Can one Calculate Fixed and Variable Cost From TC and Quantity Alone? I have been asked a question and believe there is a mistake in the problem.

I have been given a table of values, Quantity and corresponding Total cost. From those numbers I can easily calculate the Average total cost and marginal cost.

I am asked to find the fixed and variable cost for each quantity. The question provides no other information. Is this possible?

As said in my comment,

  The fixed cost is usually defined as the cost when quantity is equal to zero, and the variable cost as the total cost minus the fixed cost.

Hence, if $TC(q)$ is the total cost for the given level of quantity $q$, then $FC=TC(0)$ is the fixed cost, which is a constant independent of $q$; and  $VC(q)=TC(q)-FC$ is the variable cost.

For example, if $TC(q)=10+q$, then $FC=TC(0)=10$ and $VC(q)=TC(q)-FC=q$.


If America's economy collapsed what would happen to all of the citizens? What if the whole global economy collapsed? My journalism professor is not an expert in finance or economics but has studied history.  She is always giving us a negative lecture on the America's economy and how the rich  are taking al of the wealth for themselves and letting America fall to ruins so everyone else loses everything and just is on the streets.  She said this is basically what it like in Detroit and Michigan right now and that seeing how divided we are socially, she thinks we're going down just as worse as Rome.

She really freaked me out.  Is this true>  I know it sort of opinion based but if you can just give an answer on what would likely happen in a case of economic collapse for just America, just Europe, and if the whole global economy collapsed as well.  I know the rich have enough investments and saved resources to live for decades, but for people like me lower middle class, what will happen?

There is no simple answer to this question. She is just giving her opinion on the topic. However, so long as USD is the main reserve currency for other governments and oil is mainly traded in USD, Americans can keep buying their guns at low cost. Gun laws are more detrimental to Americans' lives and hence the economy than anything else in the foreseeable future. This is my view, there is more...


How does Google price the items on Google Play? I am a fledgling computer science researcher working in intersection of economics and computation. Please excuse me if this question seems out of place to the administrator.

I am currently studying different pricing models and studying the "optimal" way or price to sell items. I have noticed that on Google Play there are movies which one could rent or buy. Also, for movies for similar popularity I noticed that there is often a huge difference in their price. (about 10 euros). Conventionally, one looks at the valuation distribution for an item. However, that won't explain this difference in cost. There may be issues of purchasing copyrights too. However, more generally, how do companies like Google price these digital items? Do they update these prices regularly based on sale information? Is there any prior work about how can one go about doing this?

I am just looking for directions so any help is greatly appreciated.

The simple answer is they estimate the demand curves for each product and, using their cost structure and market characteristics (competition structure, etc.) set price to maximize profits. This is standard for any firm, though.

How Google in particular and these big firms in general (Amazon, Microsoft, etc.) estimate demand curves is somewhat different than the usual economist might do it. For usual demand estimation, a researcher would have to make use of market idiosyncrasies to identify demand. For example, using supply shifters with 2SLS for basic demand estimation, BLP for discrete choice with heterogeneous products, etc. Identification is such a big issue for demand estimation because a researcher generally just observes equilibrium (p, q) combinations, not the actual demand curve. We are also often constrained purely by the amount of data available.

For a big firm like Google, however, they 1) have the ability to enact exogenous perturbation in price to see how sales change and 2) have access to tons and tons of data. Using 1) they are constantly running little experiments to see how consumer behavior changes. They can then use the results to actually trace out the demand curve. In these experiments, the firm could easily take into account things like movie popularity, genre, etc. With respect to 2), Pat Bajari, chief economist at Amazon and one of the biggest names in modern empirical IO, has a (at this point) working paper with Nekipelov, Ryan, and Yang on how to use machine learning to estimate demand curves across products with lots of sample points bunches of characteristics (think thousands of product characteristics). As a "fledgling computer science researcher," you'd probably be in to this. This approach is especially relevant for people/firms with access to tons of data (like Google, Amazon, etc.)


Doubt regarding Walrasian equilibrium with complements for both agents There are two goods $1,2$ and two agents $ 1,2 $. Both have the utility function $ u_{i}=\min({x_{1i},x_{2i}}) $ for agent $i$ .The endowments are $(1,3)$ and $(3,1)$ for agent $1$ and $2$ respectively. I have to solve for the Walrasian equilibrium.

I found out the demand for $x_{1}$ for both agents and at this point I tried to clear the market for $x_{1}$:
(setting $p_{1}=1$ and $p_{2}=p$, I get)
$\frac{1+3p}{1+p}+\frac{3+p}{1+p} = 4$
 At this point I generally try to solve for the equilibrium price $p$.
But In this case, Its a trivial equation. What does this mean ? What is the equilibrium price?

Sorry if I am not seeing the obvious. I am new to this and dont know much.

Since demand equals supply holds for every price $p$, this simply means that every $p$ is an equilibrium price. However, the equilibrium allocation that $p$ supports varies with $p$. To be precise, price $p$ supports the allocation in which 1 consumes $\left(\frac{1+3p}{1+p}, \frac{1+3p}{1+p}\right)$ and 2 consumes $\left(\frac{3+p}{1+p}, \frac{3+p}{1+p}\right)$.


Federal Reserve Securities Coming Due Let's say the Federal Reserve purchases a \$100 one-year Treasury bill from the market, and puts ~\$100 of cash into the economy. A year later, this T-bill comes due, and the Treasury pays the Fed $100. What happens with this cash?

I can imagine a few possibilities:

The money is immediately reinvested in new securities. Since no new money is created, the monetary base stays constant.
The money is destroyed, shrinking the monetary base.
The money is transferred to the Treasury as Fed revenue. Since this money (a Fed liability) is no longer backed by a security, the Fed's balance sheet goes into the red.

This question is motivated by this quote from the Wikipedia page on Debt Monetization:

  The central bank may purchase government bonds by conducting an open market purchase, i.e. by increasing the monetary base through the money creation process. If government bonds that have come due are held by the central bank, the central bank will return any funds paid to it back to the treasury. Thus, the treasury may "borrow" money without needing to repay it. This process of financing government spending is called "monetizing the debt".

This seems to imply the third of my listed possibilities, but as mentioned this seems to break the promise that all Fed-issued money is backed by assets.

Currently (Apr 2017)  the Fed has a policy of reinvesting the proceeds of maturing securities in new securities, so the first option is true.  However, the Fed is believed to be considering ending this reinvestment policy in the next few months.  In that case, the second option will apply- the Fed's balance sheet will decrease and the overall money supply will decrease (assuming that the Treasury will then issue securities to keep its cash balance unchanged).   Option 3 does not really apply because the maturity of a security held by the Fed is not 'revenue'.  They would just reduce assets (Treasury bond) and l moiabilities (cash balance owed to the Treasury) at the same time.


the slope of the LM curve I'm confused because my textbook says  the higher interest elasticity of money demand is , the flatter slope of the LM curve is.

If the interest changes, then isn't it the movement along the curve in the money demand curve?

I can't understand how interest elasticity of money demand is related with the slope of the LM curve. Can someone explain this GRAPHICALLY?

It is normal that the slope of the LM is related to the elasticity of money demand. If in an economy, the elasticity of money demand is so high, for little changes in the interest rate will make fluctuate the demand so much.

If you think about the extreme case, you will understand much easily. Suppose that the elasticity of money is near to infinity, (which makes the slope of your LM near to something horizontal on (interest rate, money demand) coordinate plane. (so in this case, your response to change of an interest rate is so huge.)

The symmetrical extreme case is that this curve becomes vertical, which makes that your money demand never changes whatever the change of interest rate.


Extensive Form Games ( The game of “ chicken”) Two cars are driving at each other at great speeds.
If nobody changes directions, in 3 seconds they will collide and die a gruesome death,
yielding payoffs of −100 for both players. At every second they have to (simultaneously)
decide wether to continue or not (i.e. there are 3 periods to this game). Payoffs are as
follows: If both players choose continue for each of the three periods, then they get −100.
If at any period one player choses “not continue” and the other chooses “continue” the
player that chose not to continue gets 0 and the other gets 100. If at some point both
simultaneously choose not to continue they both get 0.

True or False: Any equilibrium has the property that one of the players chooses
not to continue, but this only happens in the last period (as in the movies!).

I just wanted to double check my answer with someone.

My answer: I think that the answer is false. Because the strategy profile where player 1 plays continue at every stage and player 2 plays not continue at every stage is a subgame perfect Nash equilibrium I believe? Because based on the one shot deviation principle, there is not point in the history where player 2 can deviate from this strategy at one node profitably. And (continue, not continue) is a Nash equilibrium for the individual game. Thus, this strategy would result in a subgame perfect Nash equilibrium without getting to the third stage of this game.

I believe you are correct -- though I will say appealing to the one-shot deviation principle here seems a little overpowered. There are only three stages to this game so checking for all equilibria (and not just your conjectured one) in each proper subgame is doable. You do seem to be applying it correctly, however!


Outputting Regressions as Table in Python (similar to outreg in stata)? Anyone know of a way to get multiple regression outputs (not multivariate regression, literally multiple regressions) in a table indicating which different independent variables were used and what the coefficients / standard errors were, etc.

Essentially, I'm looking for something like outreg, except for python and statsmodels. This seems promising but I don't understand how it works:

http://statsmodels.sourceforge.net/stable/generated/statsmodels.iolib.summary.Summary.html#statsmodels.iolib.summary.Summary

To be fully clear here, I wondering how to make tables similar to the example below:

You can use code like the following (making use of the as_latex function) to output a regression result to a tex file but it doesn't stack them neatly in tabular form the way that outreg2 does:

import pandas as pd
import statsmodels.formula.api as smf
x = [1, 3, 5, 6, 8, 3, 4, 5, 1, 3, 5, 6, 8, 3, 4, 5, 0, 1, 0, 1, 1, 4, 5, 7]
y = [0, 1, 0, 1, 1, 4, 5, 7,0, 1, 0, 1, 1, 4, 5, 7,0, 1, 0, 1, 1, 4, 5, 7]
d = { "x": pd.Series(x), "y": pd.Series(y)}
df = pd.DataFrame(d)
mod = smf.ols('y ~ x', data=df)
res = mod.fit()
print(res.summary())

beginningtex = """\\documentclass{report}
\\usepackage{booktabs}
\\begin{document}"""
endtex = "\end{document}"

f = open('myreg.tex', 'w')
f.write(beginningtex)
f.write(res.summary().as_latex())
f.write(endtex)
f.close()

The as_latex function makes a valid latex table but not a valid latex document, so I added some additional code above so that it would compile. The result is something like this for the print function:

                        OLS Regression Results
==============================================================================
Dep. Variable:                      y   R-squared:                       0.129
Model:                            OLS   Adj. R-squared:                  0.089
Method:                 Least Squares   F-statistic:                     3.257
Date:                Fri, 29 Apr 2016   Prob (F-statistic):             0.0848
Time:                        20:12:12   Log-Likelihood:                -53.868
No. Observations:                  24   AIC:                             111.7
Df Residuals:                      22   BIC:                             114.1
Df Model:                           1
Covariance Type:            nonrobust
==============================================================================
                 coef    std err          t      P>|t|      [95.0% Conf. Int.]
------------------------------------------------------------------------------
Intercept      0.9909      0.908      1.091      0.287        -0.893     2.875
x              0.3732      0.207      1.805      0.085        -0.056     0.802
==============================================================================
Omnibus:                        3.957   Durbin-Watson:                   0.999
Prob(Omnibus):                  0.138   Jarque-Bera (JB):                1.902
Skew:                           0.380   Prob(JB):                        0.386
Kurtosis:                       1.849   Cond. No.                         8.50
==============================================================================

Warnings:
[1] Standard Errors assume that the covariance matrix of the errors is correctly specified.

and like this for the latex:

Update:
Not as full featured as outreg but the summary_col function does what you ask.

import pandas as pd
import statsmodels.formula.api as smf
from statsmodels.iolib.summary2 import summary_col
x = [1, 3, 5, 6, 8, 3, 4, 5, 1, 3, 5, 6, 8, 3, 4, 5, 0, 1, 0, 1, 1, 4, 5, 7]
y = [0, 1, 0, 1, 1, 4, 5, 7,0, 1, 0, 1, 1, 4, 5, 7,0, 1, 0, 1, 1, 4, 5, 7]
d = { "x": pd.Series(x), "y": pd.Series(y)}
df = pd.DataFrame(d)
df['xsqr'] = df['x']**2
mod = smf.ols('y ~ x', data=df)
res = mod.fit()
print(res.summary())
df['xcube'] = df['x']**3

mod2= smf.ols('y ~ x + xsqr', data=df)
res2 = mod2.fit()
print(res2.summary())

mod3= smf.ols('y ~ x + xsqr + xcube', data=df)
res3 = mod3.fit()
print(res2.summary())

dfoutput = summary_col([res,res2,res3],stars=True)
print(dfoutput)

Which has the following output:

=====================================
            y I       y II    y III
-------------------------------------
Intercept 0.9909   -0.6576   -0.2904
          (0.9083) (1.0816)  (1.3643)
x         0.3732*  1.7776*** 1.0700
          (0.2068) (0.6236)  (1.6736)
xcube                        -0.0184
                             (0.0402)
xsqr               -0.1845** 0.0409
                   (0.0781)  (0.4995)
=====================================
Standard errors in parentheses.
* p<.1, ** p<.05, ***p<.01

As before, you can use the dfoutput.as_latex() to export this to latex.


What does it mean if a country's exchange rate is said to be “overvalued”? For instance, China's or Switzerland's currencies are often said to be overvalued.

This is hard to define because in general in economics the definition of overvaluation of currency is very vague. In economics overvaluation or undervaluation would be a deviation from a person’s expectation of purchasing power parity (PPP) should be (see the textbook Money, Banking and Financial markets from Schoenholtz).

So technically if you think that 1 dollar should purchase 1 euro in long run, but actually the real-life exchange rate is such that it can purchase 1,1 euro you would say the dollar is overvalued.

This being said in actual research we don’t just try to guess what the proper exchange rate should be, but we estimate some model and if exchange rate deviates from model predictions we would say it’s over or undervalued. For example, now outdated but still popular model for exchange rate determination is the monetary model of exchange rates. In this model exchange rate depends on ‘fundamentals’ such as price levels, money supply, velocity of money, real output and interest rate.

In such model we say exchange rate is overvalued if the actual observed exchange rate has a higher value than we would expect given the values of country’s fundamentals (price level, output, interest rates etc.).


How does the companies set up utility function for its own purposes? How does the companies set up utility function for its own purposes?

In another word, what is the types statistics data that is usually consider and statistical method being used to set up these functions? Just name the types of methods and types of data out.

I heard that the function itselves is always to be a secret of a company but why are they always different between different companies?

Most agents, including firms, do not actively set-up utility functions in their heads. A firm might however might have a worker create a profit function. A course related to labor economics will usually give you an idea of what sorts of things a firm considers.

A generic macroeconomic profit maximization problem that you'll commonly see is

$$\max_{K, L} \ \Pi = A[\delta K^{-\rho} + (1- \delta)L^{-\rho}]^{-1/\rho} - (rK + wL)$$

Where you have a constant elasticity of substitution ($\rho$ is the substitution parameter) with some level of technology ($A$) and weight of distribution ($\delta$) of inputs between capital and labor ($K, L$) which have costs per unit in the form of the rental rate of capital and wages ($r, w$). Maximize profit with respect to capital and labor.

In labor, you might see a very basic profit maximization setup where the worker maximizes

$$\max_{e} \  U = \mathbb{E}(\alpha + \beta (e + v) - C(e))$$

where $e$ is some level of effort, $\alpha + \beta q$ is pay given $q$ output and $q = e + v$, where $v$ is an i.i.d. random variable with an expected value of zero in this case.

The first order condition is

$$\frac{\partial}{\partial e} : \beta - c'(e) = 0$$

which will create the labor supply function.

The constraint is that the worker is individually rational, so $\alpha + \beta e \geq C(e)$, which can be simplified to just equality since the firm will maximize profit by giving just enough pay to elicit the effort they are looking for.

So the firm maximizes

$$\max_{\alpha, \beta} \ E(q) - (\alpha + \beta e) = e - C(e)$$

FOC:

$$\frac{\partial}{\partial \beta} : [1 - c'(e)] \frac{\partial e}{\partial \beta} = 0$$

$$\implies \beta = 1 \ (= c'(e))$$

In the above, we see that the firm makes sure that they get the full pay for their value of effort, but in real life, that may not mean the worker gets a piece rate part of their wage equal to 1; a worker like a car salesman may only make a commission of 8-20% of the value of the car because there are other labor and capital inputs that go into selling the car, so the salesperson may be contributing 8-20% of the effort needed to sell the car.

There are other things the firm needs to consider like screening costs, heterogeneous labor markets (differentiated skill levels), signalling versus human capital or firm specific capital, etc. I'll provide one more economic setup a firm might look at when seeing how their workers invest in human capital.

This setup comes from the Heckman and Killingsworth paper (1986 I want to say) on women in the labor force.

We have a dynamic labor supply with endogenous wages.

$$E(t) = E[H(t), K(t)]$$ where $E(t)$ is earnings at time $t$. $H(t)$ is hours of work for some period of time at time period $t$, and $K(t)$ is the stock of human capital.

$$\frac{\partial K(t)}{\partial t} \equiv \dot{K} = i[I(t), G(t), K(t)] - qK(t)$$

where $q$ is the depreciation of human capital, $I(t), G(t)$ are investment and goods meant to increase human capital (note that human capital is an input into its own production.)

The worker then has some utility to maximize:

$$U = \int_0^D e^{-st} u[c(t), m(t)L(t), K(t)] \ dt$$

where $c(t)$ is consumption at time $t$, $L(t)$ is leisure, and $m$ is a multiplicative factor, an underlying preference for leisure over time that changes involvement in the labor force.

Constraints:

$T = I(t) + H(t) + L(t)$

$W(t) = E(t)/(I(t) + H(t))$

$A(D) = A(0) + \int_0^D e^{-rt} [E(t) - P(t)C(t)] \ dt \geq 0$

(the last condition is just a transversality condition; cannot die in debt)

Heckman neutrality:

$E(t) = k H(t)K(t)$

$\dot{K} = i[I(t)K(t)] - qK(t)$

$U = \int_0^D e^{-st} u[c(t), m(t)L(t)K(t)] \ dt$

(the third condition is different from the above actually)

$u(t)$ will be the shadow value of cash, and $w(t)$ will be the shadow value of human capital.

Solving from the first order conditions will get you a time path for $w(t)$

Other recommended reading: "Personnel Economics in Practice", 2009; Lazear, Edward P. and Gibbs, Michael


Need help reading early 20th century stock market list I have a bit of a problem understanding the stock market price listings for the London stock market. I am mainly concerned with Argentinian government bonds. So far, I have always used the Investor's Monthly Manual for bond prices. That was fine as long as I only needed monthly data. However, I now need daily data.  So I turned to the London Times for bond prices. However, there the bond prices are listed in a somewhat different format. In order to check whether I understand these prices I tried to check the Times prices against the Investor's Monthly Manual (IMM) prices. However, I cannot really make sense of it. For example, if I look up the last day price of the Argentinian 1886-1887 loan for November 1911 in the IMM, I get 104.5. See here:
https://imgur.com/a/6cdMKWs

If I look up the same bond in the "Business Done" section of the Times I get the following prices: 29 Nov 1911: 104 7/8 3/8 and 1 December: 104 7/8 1/2 [the 30 Nov issue does not have any bond price listings]. Here are the pages from the Times:
https://imgur.com/a/vt17mWx
https://imgur.com/a/J2LZbL4

I would be grateful for any advice as to how to read the bond prices with the double fractions in the Times and for any explanation why there is a difference between the IMM and Times.

Thank you!

I am unfamiliar with this style of notation, but in my opinion it seems likely that the double fractions denote buy and sell prices. I.e. on Nov 29th 1911 the sell price was 104 3/8 and the buy price was 104 7/8. This gets you an average or mid price of 104 1/2 = 104.5.

It is also possible that the two numbers denote the daily opening and closing prices, but the variation seems small for this.


Why does marginal private cost increase with quantity? There are often two ways of interpreting the demand and supply curves.

The market

The demand curve consists of all buyers -- some who value the good more than the market price, and some who value it less. For more quantity to be produced, you have to lower the price so that those who value it less will buy. It makes sense that it is downward sloping.

Similarly the supply curve consists of all producers -- some who can produce the good at a lower cost than the market price, and some who can't. In this case, for more quantity to be produced, you have to raise the price so that those less efficient firms will be motivated to produce. It makes sense that the curve is upward sloping.

Marginal benefits and costs

Now we look at the curves in the context of one producer and one consumer. The demand curve of the consumer is downward sloping because of marginal utility. This makes sense to me.

What doesn't make sense to me is that the supply curve is upward sloping because marginal costs increase. Why is it that it costs more to make the next toy than it did the last?

If I've had any misconceptions or misunderstandings, please point them out to me. Thank you for the help!

What doesn't make sense to me is that the supply curve is upward sloping because marginal costs increase. Why is it that it costs more to make the next toy than it did the last?

The supply curve depicts the short time supply curve.

If resources are abundant, low cost producers can easily increase production by building another factory that is at least as efficient as the exisiting ones.
However, building a new factory takes time. In the mean time the slack will be met by increased production from higher-cost producers and overtime work, both of which have higher costs.

If there is a lasting increase in demand, the most efficient manufacturers will build additional factories that can produce at a low cost and thereby increasing supply, shifting the supply curve to the right.

If resources are scarce, then increasing production will mean that you have to use resources with higher cost. Higher wages for workers, using farm land that yields smaller harvests, mine lower quality ore and so on.

The cost increase can be offset by technological advances or lowering of other factor costs. Take the shale oil industry, where improved drilling technology has greatly increased the production per drilling rig. Also, the factor cost has fallen for labor and drilling services. The combined effect has reduced the cost from ca \$70 per barrel to ca \$40 per barrel. This has allowed US shale oil producers to increase production despite oil prices dropping from \$120 to \$50 per barrel. However, there is no guarantee that this can offset the entire cost increase; increased demand can result in permanently higher prices.


Transparent Fractional-reserve banking as an alternative to the current system I come from a layman perspective, but I've been trying to understand macroeconomics and finance. Currently I'm struggling with the current topic. Here I'm not worried about the system transition just arguing about the consequences of two different systems.

I accept that lending capital that is not being used is great for growing the economy, and banks seem a great and impersonal way to intermediate between borrowers and lenders. I understand fractional-reserve banking in it's current form, but I disagree with it, it makes the good times better and the bad times worse and than we need monetary policy to smooth it out. Wouldn't it make more sense to smooth banking in the first place? But expanding the money supply by lending money but still keeping it available in a deposit account seems to lead to financial bubbles. I argue that we could avoid this by being transparent about deposits in the following way:

When you open an account you settle how much you're comfortable to loan out and must be made aware of the risks implied.
When you check your balance, the funds that have been loaned out or are marked to be loaned out are displayed but are not available to use.
This makes intuitive sense to me because if I lend 100\$ to my friend, than I'm short of those 100$ and I'm aware of that, I can't use them. Why shouldn't banks be held up to this standard?

I argue that this would avoid bank runs, because you can clearly check how much is available and won't fear that you'll lose everything, while still having the benefits of borrowing albeit with slower growth but also milder recessions. This might be argued to be impractical, but dealing with the consequences of the current system seems to me to be even more impractical.

Would this be a realistic alternative, and if so what would be the effects on the economy, comparing to the current system?

As mentioned by @BrianRomanchuk which system is "better" is matter of opinion as that includes value judgement. For a radical ascetic a system which forces people to live on a subsistence level is the best system possible.  However, what you propose is most likely not optimal from economic perspective.

What you propose here is basically transitioning to some sort 100%  fractional reserve system. There have been proposals for such system in the past - it is called 'the Chicago plan'. The idea first gained some traction in 30s at the University of Chicago (hence called the Chicago plan) and few years back the plan generated a bit of a buzz when Jaromir Benes and Michael Kumhof (IMF economists) published their paper Chicago Plan revisited where they tried to revive the idea. However, the idea was not really embraced by the profession. There are several reasons why.

You are right that if there would be 100% reserves and banks could lend only money that are in investment accounts (what you call setting aside), it would prevent the chance of bank runs (at least for the deposits itself). But evidence shows that deposit insurance by government does this equally well. You might not know that but in most developed countries including US all banks are by law required to have insurance for their deposits. Hence, even though your deposit money are technically being lend out you will not loose them if bank goes bust (at least up to certain limit, in the US the limit on deposit insurance is \$250.000, see here). Hence unless you are very high up in the income distribution you never have to make bank run as your money is safe, only if you are quite rich you might worry about it, but if you are rich enough to have such balance on your deposits there are other ways that you can protect yourself from this, and generally you would probably have some wealth manager who actually invests money for you. The only advantage of Chicago plan would be that there are always some 'shadow banks' that try to get around the deposit insurance rules by disguising themselves as other types of financial institutions, but it is generally believed this problem can be controlled by appropriate regulation.
Fractional reserve system has many advantages relative to the full reserve system. In a fractional reserve system money supply can expand and contract more flexibly based on what is the demand for loans in the economy and consequently government through the central bank can easily manage money supply just by setting interest rate instead of actually changing monetary base. However, in your system that would no longer be possible and central banks would have to manage money supply through changes in monetary base which is much harder to do with the same precision as when you just play with interest rates. Managing quantity of money in economics is extremely important for mitigating the boom-bust cycles. Hence, even if we would agree for the sake of the argument the Chicago plan could help mitigate some financial crises it could make non-financial crises more difficult to cope it.
Under the 100% reserve plan there would be, in  the most likelihood, an overabundance of sterile deposits. Money that are just deposited but never lent out to help finance investment which is extremely beneficial for firm creation, job creation and economic activity in general. In such system firms would have tougher time to invest into new factories R&D and so forth as most national savings would not be put into productive use.

Hence, generally mainstream economists are not very cordial to the 100% reserve system and it is believed such system would be worse for the economy as it has some serious drawbacks and only some tentative possible advantages.

The only country brave enough to try to implement such plan was Iceland, but to the best of my knowledge even though they announced in 2015 they want to implement it they did not really do it yet. According to most recent source I managed to find on their reform from 2016 it is still being reviewed by the committee set up to examine such system.

However, let me reiterate that again what system is a best is a matter of opinion. A system that delivers the highest possible level of material welfare might not be the best system for everyone. You might oppose fractional banking on moral grounds etc. but most of the profession supports the fractional reserve system, or at least does not really endorse any alternative as better. In fact as an undergraduate economist the only other monetary system you will hear about is the gold/silver standard and even that probably in history class - by this I am just trying to show that among mainstream economists fractional reserve is really taken so for granted that alternatives are often, for better or worse, considered not worth to even mention to undergraduates.


How do deal with negative values when finding log difference? I’m trying to run a regression with GDP quarterly growth as the dependent variable. I’ve been asked to find the log diff of the data values however I’m unsure on how to do this on excel and how to deal with negative values

In excel use the LN function to perform the log.  The difference in logs should be done with the log of the most recent value minus the log of the past value
LN(Present) -LN(PAST) = Growth%

Take the excel handle and pull it down so that you can copy fill the formula to do all the
quarterly periods.

At this point you may also want to chose which decimal place you want to set your value to make the data look presentable by using the decrease/increase decimal value in the number section of the home tab within the menu bar.

I am not sure about your last statement about negative values.  If you mean that what to do when you get a negative value after the log transformation then that value is normal and be part of your regression analysis because you are seeing a decrease in change over time.
However, if the numeric value that you are log transforming is a negative value (which should not show up in the aggregate Real GDP values time series)  then you should pick a method to adjust the value before you use the log.
There are some sites that does offer suggested options ( https://blogs.sas.com/content/iml/2011/04/27/log-transformations-how-to-handle-negative-data-values.html  ) ; however, just like in data science, pick a method and stick to it and report what you did.


Calculating nominal GDP I would like to understand one detail of how nominal GDP of a country in a given year is calculated. It seems to me that the GDP in each country is first calculated in the national currency and then is converted to dollars. Is this correct?

If yes, how can one make this conversion if a currency can weaken of strengthen itself significantly with respect to dollar within a year?

Here is the list of such GDP's per country per year in US dollars:
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

For example take Russia, GDP in 2013 was 2,096,774 million dollars and in 2014 it is 2,057,000 million dollars.

Now, we know that the rouble weakened significantly in 2014, (almost twice). So it looks like Russian GDP in dollars should have dropped significantly as well. But it had not done so. Why?

There is no need to complicate things here - just try to find annual exchange rate used by IMF. Worldbank's data are here. LCU stands for Local Currency UnitsYou may see a drop of Rub/$ rate from 31.84 to 38.38. (Drop of Ruble, of course.)
National statistics provides input figures for international accounts. According to Rosstat, Russian nominal GDP grew in the Y2014:

Y2013 - 66,190 bil. Rub,
Y2014 - 71,406 bil. Rub.

Using  NGDP dollar evaluation from your post, annual exchange rate for Y2013 is 31.5 Rub/$; in Y2014 rate is 34.7 Rub/$, which makes some sense. But indeed Rub/$ rate was somewhat closer to 38.5 (see here). So, IMF figure for the Y2014 from your wiki reference seems to be more correct: bil. $1,857,461 for Russian NGDP. (do not forget about Crimea correction to appreciate the difference).
So, in fact Russian nominal GDP did drop significantly in current dollar terms in the Y2014.
Imho, PPP is not applicable for your question as Russian GDP by PPP is of different magnitude.


Resources for mathematician trying to develop (macro)economic thinking? I have a 'hobbyist' interest in economics (read several popular science econ books and listen to a lot of podcasts).

Recently I've been trying to take this further by looking at courses in economics. I have a strong maths background (PhD in stats), and I find a lot of early undergraduate courses interesting, but they often seem to ignore the underlying maths, so feel like they are missing out some important detail. On the other hand, I find graduate level courses a good level but feel like they don't build my economics 'intuition'; which I get the impression is very important to develop economic thinking.

My question is are there any resources that offer a good balance between the two? I'm particularly interested in macro, but any micro resources would also be interesting.

You might be interested in David Romer's Advanced Macroeconomics. It's a grad-level textbook that includes grad-level math, but the focus is off the math and on the intuition. It doesn't spend much time going over certain tools, like dynamic programming, so it gets a bit hand-wave-y at some points, but it sounds like this might be the right balance for you.


Is there a way to link Berge's theorem of maximum to Envelope theorem? Berge's theorem states

  Let $X \in \mathbb R^m, \Theta \in \mathbb R^n $, $f : X \times \Theta \to \mathbb R$ be a jointly continuous function, $C : \Theta  \rightrightarrows X$ be a continuous(both upper and lower hemicontinuous) compact-valued correspondence.The maximized value function and maximizer are
  $$V(\theta) := \max_{x \in X}f(x, \theta)$$
  $$C^\ast(\theta):=\{x \in C(\theta) \mid f(x, \theta )=V(\theta)\}$$
  Then $V : \Theta \to \mathbb R$ is continuous and $C^\ast :\Theta \rightrightarrows  X$ is upper hemicontinuous.

According to Varian's Microeconomic Analysis(1992), page 490, Envelope theorem is simply:

  $$\frac{dM(a)}{da}=\frac{\partial f(x,a)}{\partial a}\mid_{x=x(a)}$$

$x(a)$ is the maximizer of $f(\cdot, a)$.

It seems to me Envelope theorem entails Berge's theorem, but the derivation looks way simpler. Is there a relationship between the two?

They are related and usually fall into the same discussion, but as @Alecos mentions in the comments, the two theorems show different things.

I suppose the connection that you're after is the fact that if
the derivative
$$
\left .\frac{\partial f(x, a)}{\partial a} \right |_{x=x(a)}
$$
exists, then because differentiability implies continuity, you might be able
to get part of theorem of the maximum out of it. However, to compare and contrast two theorems you mustn't just look at the results. You need to look at the assumptions as well. For example, the theorem of the maximum doesn't assume any sort of differentiability. The envelope theorem does (at least some forms of it). In any case, the assumptions that go into each are different (some stronger, some weaker).

Also, there is this. The envelope theorem
doesn't tell you that anything about the control function. Therefore, you definitely wont be able to get the result that $C^*$ is upper hemicontinuous.


Do heterogeneity in consumption baskets lead to very different inflation rates for different consumers? CPI is measured against a single consumption basket. In reality, consumers each have their own set of consumption goods, so each face their own "individualized CPI" rates.

But how different are those "individual CPI rates"? Has there been work on this?

Why I'm asking: economists frequently state that investors should invest in "inflation-adjusted products" to hedge against inflation. The problem is, if each individuals' consumption basket is sufficiently different from that used to compute CPI, holding inflation-linked securities may not be a hedge, but rather introduce more risk.

Your intuition is entirely correct. Inflation is calculated based on a "standard basket", whereas real baskets vary among different consumers. As such, the incidence of changes in prices affect consumers differently.

A good treatment of the issue is this piece by the IFS, UK. Basically, distributional effects of inflation would not exists if:

households buy the same
price of all items change equally

As you can imagine, both are not true. The report calculates then the rate of inflation faced by different households, taking Sept of 2008 as example, leading to the following result:

This is, inflation can be very different across households. Check the document for more details and insights.

Finally, an example of a theoretical treatment (aka model) is here. The authors model a monetary economy where the cost of credit is a non-linear function of income, such that the rich have a lower cost per unit of credit. This means that rich buy their consumption with a greater proportion of credit than cash, compared with the poor. Then, as inflation is basically a tax on cash, this means the same inflation affects the rich and poor differently. In fact, inflation is regressive. This is a well-known fact in political discussions (e.g. here).


real or nominal GDP to compare to wage price index? The recent Australian budget projects trends over the next four years.  I'm looking at a summary here.  If I want to calculate the share of GDP going to wages, should I compare the percentage changes in the Wage Price Index to the changes in Real GDP or Nominal GDP?

Wage/labor share of income/output is total compensation of employees divided by total output (See Schneider 2011). This share is typically calculated using nominal wages and nominal GDP.
If you want to calculate wage/labor share of income/output then you should use total wages divided by nominal output:
$$ s_L = \frac{WL}{PY}$$
Where $s_L$ is the share, $WL$ are total wages (wages $W$ times labor input $L$) and $PY$ is nominal GDP (real GDP $Y$ times aggregate prices $P$). However, note it's not necessary to find statistics for $P$, $Y$, $W$ and $L$ separately most countries will track statistics for both $PY$ and $WL$ directly.
Note you cannot calculate it from wage price index alone. That is simply impossible. Wage price index only tells you how much wages risen over some period of time relative to some base point in time. That is insufficient information to figure out what was total compensation. In fact from wage price index you cannot even figure out what $W$ is, you can just use it to track how $W$ change over some period of time. And wage price index gives absolutely no information about $L$, so it is impossible to calculate the wage/labor share of income/output using only output and wage share index.


Confusion about the effect of an increased expected inflation on the price level In Mankiw's Macroeconomics 7th edition, on page 99, there is the following equation, which states that "the price level depends not only on today’s money supply but also on the money supply expected in the future":

$$M/P=L(r+E_{\pi},Y)$$

where $L$ stands for the demand for real money balances and $r$ for the real interest rate. The author then poses the following thought experiment:

  Suppose the Fed announces that it will increase the money supply in
  the future, but it does not change the money supply today. This
  announcement causes people to expect higher money growth and higher
  inflation. Through the Fisher effect, this increase in expected
  inflation raises the nominal interest rate. The higher nominal
  interest rate increases the cost of holding money and therefore
  reduces the demand for real money balances. Because the Fed has not
  changed the quantity of money available today, the reduced demand for
  real money balances leads to a higher price level.

My question is: I understand that, by the above equation, considering that $M$ is fixed, a decrease in the demand for real balances should lead to an increase in $P$. However, what exactly happens in the real world that causes the price level to rise as a result of people trying to get rid of the excess money they are holding? I can see that, if they were spending those "extra" balances on consumption, that would increase the demand for goods and services, which in turn would lead to higher prices. But since the reduction in $L$ was motivated by a rise in the interest rate, it is savings that is increasing, and not consumption. So, what is going on here? Thanks in advance.

From what I understand, everything here has been expressed in real terms. With the announcement, people now expect higher money growth and 'higher inflation'. True that the nominal interest rate rises, they earn greater return on savings, yet it is of no use to them if price level rises. Note that, here, only real rise in interest rate would induce people to save more. Thus now, according to the author, consumption tends to rise and how that might lead to rise in price level is clear.


Supply and Demand: Why should lower costs lead to a rise in supply? I know that the conventional explanation linking fall in cost of production and rise in supply is that a fall in cost of production of A means that it is more profitable to produce A. Thus, suppliers will be incentivised to produce more of A, hence rise in supply of A.

My question is - why should suppliers even want to produce more? Can't they just enjoy the higher profits attained automatically through the fall in COP? What exactly is the explanation for them wanting to produce more?

This is the missing link in many explanations I see and I hope to clarify this, thanks!

You can think about this using the basic theory of the firm that we teach in principles courses, such as this one.  The specifics of the graph will change depending on the assumptions of the market it represents (perfect competition, monopoly, etc), but the story should be the same.

In brief, each individual firm makes a production decision so that marginal cost (MC) equals marginal revenue (MR), where "marginal" means the next unit of production.  Keep in mind that a firm is always trying to maximize its profits.  Therefore, if MC > MR (the cost of the next unit of production exceeds the revenue of the next unit of production), it means the firm could increase those profits by producing one unit less.  If MC < MR, then they could increase profits by producing one unit more.  Only when MC = MR can the firm no longer increase its profits by changing the quantity it produces.

If anything happens in the market to lower production costs, it means the firm's old production decision leaves them with MC < MR, and thus they should produce a higher quantity.  Continuing to produce the same quantity would mean they're earning lower total profit than they could be.

Of course there are a lot of simplifying assumptions in this model, which is why it's one taught in principles classes.  But that's the foundation of the idea you're asking about, I think.


Does this explanation pertaining to the Supply Curve and Law of Supply make sense? I was having some trouble understanding the Law of Supply, and I now understand that I was looking at it from the wrong perspective.

Now, I'm confused with shifts in the Supply Curve. After reading through the answers in the thread, I think I'm on the right track.

However, some of the material I'm studying doesn't make sense. Take a look at my study material below. If you were to shift the image 45 degrees counter clock-wise, yes the curve would shift left, but that doesn't indicate "a smaller quantity at any given price".

It's the same quantity, isn't it? I hope I'm not missing something completely obvious. My apologies if I am, and thank you for your input.

I googled "shift in supply", and below is what I was expecting:

The figure from your study material looks very much like the one you found via Google. In particular, it shows a leftward shift in supply and a corresponding reduction in quantity supplied for any price. We can confirm this with a minor edit to the figure: