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