econ extra cred wksht week 13

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Economics

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Jan 9, 2024

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Sarah Tabani 33843706 Extra credit Worksheet Week 13 1. A strong dollar is a bit of a misnomer when it comes to evaluating its effect on the overall macroeconomy. Explain. The term strong dollar is used when the value of the US dollar is more than other currencies. The concept of a strong dollar can have both positive and negative effects on the overall macroeconomy. When the dollar becomes stronger, imports are made cheaper for the US. This is seen as a positive effect of it; as customers benefit from this when industries use cheaper imports to make their products. However, when this happens, US exports become too expensive for foreigners to buy. This leads to a decrease in the use and demand of americans goods in the international market. This may then have a negative effect on industries that rely solely on exports. 2. Fill in one column of the chart using information from a newspaper or internet site. Then fill in the other column without looking up information. (hint: exchange rates are inverses of each other) Value of one unit of other Currency Value of 1 U.S. dollar Currency 144.81 0.0069 Japanese Yen 1.36 0.74 Canadian Dollar 35.46 0.028 Thai Baht

12.05 0.083 Ghanaian Cedi 4.92 0.203 Brazilian Real 0.93 1.075 European Monetary Union Euro 803.50 0.0012 Nigerian Naira 83.43 0.0119 Indian Rupee 1. Consider the markets (Supply and Demand) for dollars and yen. Imagine it is 1979. The initial exchange rate between the yen and the dollar is 1 dollar = 99 yen. Fed Chairman Paul Volker undertakes serious contractionary monetary policy to stop inflation, and it has the corresponding (and predicted) effect of drastically increasing interest rates in the U.S., causing real U.S interest rates to go up relative to the real interest rates in other countries, including Japan. This means U.S. T-bills (U.S. bonds) are giving a higher real rate of return than the bonds of any other country in the industrialized world. a. Explain what would happen to the price of the dollar and the yen. There would be an appreciation of the US dollar because of the higher demand and fixed supply of it. As for the Japanese yen, the value would decrease as there would be less demand for it. b. Has the dollar appreciated or depreciated? Explain in words. The word ‘appreciation’ is used to describe an increase in the value of a currency relative to another. The US dollar has appreciated, it has become much stronger than the yen in this case.

c. Assume the dollar (appreciated or depreciated) by one third. What is the new value of the dollar relative to the yen? If the dollar appreciates by that amount, and the exchange rate was $1 = 99 yen, the new value of the dollar relative to the yen would be about $1 = 132 yen. d. What is the effect on the U.S. economy (Imports and Exports…) of this change? Effect on imports - the stronger the dollar, the cheaper the imports for US businesses and consumers; imports may increase as foreign goods and services become more affordable. Effect on exports - US exports become more expensive for foreign buyers due to the strong dollar, possibly leading to a decrease in exports as US goods and services become more expensive. e. Is this consistent with the goal of the FED to fight inflation? Explain. The appreciation of the US dollar is consistent with the goal of the FED to fight inflation. As the interest rates increase, the FED aims to cool down the economy, which reduces pressure from inflation and attracts more capital to US assets. When the dollar becomes stronger, inflation is reduced as imports become cheaper and increase domestic demand for foreign goods. Although the strong dollar helps beat inflation, selling products abroad may become more difficult for US exporters as their products become more expensive. The overall impact on inflation and the economy depends on several other factors too. 2. What is the Fed doing with interest rates today? Why? Should the FED fight inflation today by raising interest rates? Explain your answer. As of today, the Federal Reserve is holding the benchmark interest steady at a range of 5.25% to 5.50%. This rate was set in October and the next policy meeting of the FOMC is to be held next week. There are several reasons why the Fed may choose to hold interest rates steady at this time: - Signs of easing inflation: recent economic data shows some signs that inflation may be starting to cool down. This could give the Fed pause before raising rates further. - Concerns about economic growth: the global economy is facing a number of challenges, including the war in Ukraine and the slowdown in China. Raising interest rates could further weaken economic growth. - Balancing inflation and unemployment: the Fed’s dual mandate is to promote maximum employment and stable prices. Raising interest rates too quickly could lead to higher unemployment. I believe that the Fed should not fight inflation today by raising interest rates because:

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- The economy is already slowing down: raising interest rates could further weaken the economy and lead to higher unemployment. Higher interest rates could make it more difficult for businesses to borrow money and invest. This could lead to slower economic growth and job creation. - The global economy is facing a number of challenges, raising interest rates could exacerbate these challenges and lead to a global recession. 3. Explain how Social Security is a social insurance program, not an individual retirement plan. Social security is considered a social insurance program rather than an individual retirement plan because it operates completely differently than what a private retirement savings account would operate as. It is compulsory to contribute to the social security insurance program; workers have to distribute their money amongst this program through their earnings, so the money is cut through their payroll, through taxes. Since this is mandatory, stability is ensured for the program. The benefits you inherit through this program are also based off of your payroll, unlike the benefits you receive through a retirement plan, those are estimated through calculating the amount of money you have saved up or invested. Social security benefits are also designed in such a way that they clever a workers pre-retirement income, which helps provide a stable financial environment during retirement, disability or in some cases, sudden death. The goal for this is to prevent poverty when an individual goes through such life events. The program has also been created to protect individuals from going through economic hardships. It's very common to go through difficult items financially, and when such a time comes, you will have the social security funds to help you get through it. Although this money is not there to get you through retirement, it could but that is not the entire reason that it was created. Lastly, and most importantly, social security is based on the concept of risk pooling. It has been designed to act as a safety net for when individuals go through economic hardships due to their disabilities or age etc. Each person is at equal risk of such events happening in their lives which makes this a fair system. The aim for this system is to provide coverage for the entire population that works, ensuring that they contribute an equal amount to the system, as they benefit an equal amount in return. However, the eligibility for this program is not determined by one's individual financial need, everyone is able to access it if they are currently employed. These three reasons are the main ones as to why social security is a social insurance program, not an individual retirement plan.

4. How does the Social Security system work? (Be specific…how does it get its funding, how does it pay out benefits?) The social security system is one that exists in the USA; it is a social program that was created to provide individuals and families with financial support that were facing economic challenges due factors such as: retirement, disability or sudden death in the family (death of the person who earned the most and supported the family). The primary source of funding for this system is parol taxes that are collected from workers and their employers. These taxes are imposed on those that earn wages or are self employed. The current tax rate for social security is 6.2% for the employer and 6.2% for the employee, for a total of 12.4% . It's different and much less for Medicare; the rate is 1.45% for the employer and 1.45% for the employee, for a total of 2.9%. As a part of this system, the amount of earnings subject to social security taxes is capped at a certain limit, this is known as the taxable wage base. If their earnings cross this limit, individuals do not have to pay social security taxes on any additional income. The taxable wage base is adjusted every year, and is currently $160, 200 for the year of 2023, and is set to increase next year. Although payroll taxes are the primary source of funding for this system, the social security system also earns interest on the investments that are held by trust funds. Adding on, some social security benefits may have to pay federal income tax for certain individuals that have higher incomes. That is how the social security system works, and this is also why people like to participate in it; you can retire early and still live with benefits although they are a bit less than what you'd get to have if you retire at your usual age. That is known as the full retirement age and is determined by the year of birth and increases slowly. Workers also earn credits based on their work history and income for which they pay the taxes. The maximum amount of credits that an individual can earn is 4. And individuals are encouraged to work in this system, as they have to have a certain amount of credits by the time they retire, in order to get those benefits. In some cases, spouses are also allowed to get the benefits, which would be half of the other spouse's full retirement benefit. However, this is a social insurance prgr`m, which is very different from a retirement plan. 5. What is the social security trust fund? How much is it worth? What is it for? The social security trust fund is a critical component of the social security system of the USA. there's two parts to it; the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. These funds are used to finance social security benefits like

retirement and disability benefits. The funds are collected through taxes that are paid by current workers’, it comes out of their payroll. Up until April of this year, the fund was worth $2.9 trillion. The sole purposes for which these trust funds are used are to pay for benefits and program administrative costs . The Social Security trust funds hold money that is not needed in the current year, to pay benefits and administrative costs. And by law, it has to be invested in special Treasury bonds that are guaranteed by the U.S. Government. 6. What is the state of the current U.S. Economy, in terms of the three traditional roles of Economics? What about in terms of broader goals of well-being? (Feel free to answer this question relative to another country that is important to you instead of the U.S.) The current U.S. Economy is performing fairly well in terms of the three traditional roles of economics: production, consumption, and distribution. The U.S. unemployment rate is at its lows, and the economy is growing at a steady pace. In terms of broader goals of wellbeing, the U.S. is still facing challenges such as income inequality, poverty, and access to health care. The state of the current economy in another country that is important to me is Pakistan. Pakistan has an alarmingly weak and fluctuating economy. In terms of the three traditional roles of economics, Pakistan is performing awfully in terms of production, consumption, and distribution. In terms of broader goals of wellbeing, Pakistan is not really making progress in terms of poverty reduction and access to education. Things keep changing because of the corrupt government and the amount of loans that the country fails to pay back; but there is hope that things will eventually turn back to normal in the near future.

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econ extra cred wksht week 13

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