Comprehensive Notes on Monetary Policy, Fiscal Policy, and Trade Economics

Open Market Operations & Quantitative Easing:
- Buying government bonds increases bank reserves.
- More checks deposited lead to increased reserves, increasing credit supply and decreasing interest rates.
- Federal Reserve (Fed) targets lower federal funds rate.
Credit Supply and Inflation:
- As lending increases, M2 (money supply indicator) also increases.
- According to the Quantity Theory of Money, more money growth leads to more inflation.
- Credit supply shifts up can result in long-term inflation.

Crowding Out Effect:
- Related to fiscal policy; when government increases transfer payments to stabilize the economy, investment spending may decrease.
- Increased government transfers lead to less effective multiplier effects as investment spending falls.
- Example: Increased unemployment insurance enables individuals to maintain consumption, supporting the overall economy.
Government Borrowing:
- Increased transfers require government borrowing, which shifts credit demand up and drives interest rates higher.
- Higher interest rates diminish borrowing by households and businesses, a phenomenon termed crowding out.
Credit Demand vs. Credit Supply:
- While people may have increased savings due to transfer payments, individuals can't save from earmarked funds like SNAP or Medicaid.
- Increased demand for credit driven by government borrowing competes with household and firm borrowing, raising interest rates.

Trade War and Economic Uncertainty:
- Uncertainty reduces effectiveness of expansionary monetary policy as banks tend to hold higher reserves rather than increase lending.
- Due to cautious behavior, banks may avoid lending more even with increased deposits.

Manufacturing Output vs Employment (1980 to Great Recession):
- Manufacturing output increased by 50%, while manufacturing employment decreased by 30% due to automation.
Post-Great Recession Trends:
- Manufacturing output improved post-recession but stagnated since 2016 despite initial recovery.

Low Growth and Inflation:
- The situation of low growth combined with inflation is known as stagflation.

Comparative Advantage:
- The principle states countries benefit from trading based on their efficiencies in producing different goods.
- Example: U.S. can produce 20,000 iPhones per year or 10 innovations, while China can produce 5,000 iPhones or 1 innovation.
- Opportunity cost for the U.S. is 2,000 iPhones per innovation.
Specialization and Trade Gains:
- Through specialization and trade, both countries can potentially produce and consume more than they could in isolation.
- U.S. has absolute advantage in both production types but should specialize based on comparative advantage.

Global Economic Integration:
- Countries that trade with each other are less likely to engage in military conflicts.
- Historical context: Post-WWII economic relationships were formed to prevent wars.

Optimal Tariffs:
- Despite free trade advocacy, tariffs may be justified for strategic security interests or if they mitigate supply chain vulnerabilities.
- Temporary protections can help infant industries grow before competing globally.
Revenue Collection from Tariffs:
- Tariffs can generate revenue when demand for goods is inelastic, yielding higher profit from taxed goods.

Understanding Current and Financial Accounts:
- Current account: Measures trade in goods/services, factor payments, and transfer payments (e.g., remittances).
- Financial account: Tracks investments and capital flows into/out of a country.
Equilibrium:
- The current account and financial account must balance, with net exports equal to net capital outflows.
- Government deficits often influence trade deficits more than the reverse.

Upcoming Chapters:
- Transitioning to Chapter 14 on international trade, focusing on comparative advantage and practical applications in real-world economies.
- Expect several review and application questions in the upcoming exam.