Chapter 8 - Stabilization Policy

http://www.ibtimes.com/articles/20090520/spending-without-jobs-strange-case-todayrecession_1.htm

Automatic Stabilizers Help Increase Consumer Spending in Recession

Summary
There has been a decline in employment in manufacturing, construction, retail and financial services. In the first quarter, there was an increase of 2.2% in consumer spending while 700 000 jobs were lost over the three months of the quarter. John Silvia, the Chief Economist wonders if the economy was affected by the low employment and the consumer spending or were households over-saving? Recently, employment insurance and reduced income tax payments contributed to enormous income gains for households to ease the recession. As well, transfer payments such as welfare, social security and disability also have increased more than what was expected.

Connection
In Chapter 8, the definition for automatic stabilizers are government programs react automatically to help adjust the level of aggregate demand during changing economic conditions. The article introduced the two most recognized automatic stabilizers which were the employment insurance and the progressive income tax. While employment was declining, an increase of employment insurance contributed to enormous income gains for households to ease the recession. The textbook explains that since individuals are unemployed, their spending decreases, the multiplier effect initiates and overall spending in the economy declines. By receiving some money in the form of employment insurance benefits, it encourages consumers to spend more. Lastly, a reduction in the progressive income tax means that a lower percentage of income in taxes is paid. It provides the individual with a greater proportion of income to spend.

Reflection
It is amazing how automatic stabilizers can still stabilize the economy that is in a recession. It is good sign that these automatic stabilizers are successful contributions that helps increase 2.2% in consumer spending when there are so many job losses. With the rise in overall spending, the unemployment should be seen more of a concern. I believe that the increased spending will slowly take an effect on creating a demand for more workers, which can reduce the level of employment. Hopefully, consumers will gain the confidence in boosting the employment growth. It sounds likely that the worst of the economy may soon be over.

Chapter 7 - Money and the Canadian Banking System

http://www.azcentral.com/news/articles/2009/03/03/20090303mr-trade0304.html

The Good Value of Barter in the Bad Economic Times

Summary
David Robinson, is one of the 500 members in the Arizona Trade Exchange who barters for $50 000 worth of services to maintain business operations. To be a member, a one-time fee of $495 is necessary to join. He trades granite countertops for services like his truck maintenance, office cleaning and air conditioning. Rob Miller, founder of the Mesa-based trade exchange says that the Arizona Trade Exchange had a total of $4.9 million in transactions. National Association of Trade Exchanges states that among this exchange group, there are 400 exchange groups as well that have transactions that are worth billions of dollars.

Connection
Arizona Trade Exchange is an example of a barter system. In order for barter to take place, one needs to have some item to offer for exchange. This form is a direct bartering system that requires a coincidence of wants from another person. It is the medium in which goods or services are directly exchanged for other goods or services, without the use of money. That is, if you have an item to trade you have to find someone willing to sell the item that you desire.It is difficult to express values or prices in a barter system. With no common denominator, there can be as many prices for one item as there are articles for trade. As well, divisibility is also a problem with barter because it is not possible to divide many items up into smaller units.

Reflection
In our economy, money performs the function of being a store of wealth, as well as a medium of exchange. However, the barter system is not dead. It’s good that some people are seeing the value of barter in the bad economic times. Exchange systems can generate more customers together in producing new sales and growing higher mass of businesses. It acts as a great way to offset expenses by paying in trade instead of cash. Therefore, you are able to preserve cash. Some individuals resort to barter so that they can avoid paying income and sales taxes.

Chapter 6 - Determination of National Income

http://www.nytimes.com/2009/02/03/business/economy/03econ.html

Americans are Saving More than spending

Summary
One government report showed that the American spending decreased for the sixth month in December, while the other report said that construction spending dropped 1.4% in December from November as house values fell. In the last three months of 2008, the personal savings rate of 2.9% grew surprisingly to it’s highest peak in since 6 years when it’s country was getting better from the recession and the 9/11 attack.. “If households are shying away from spending, what’s going to cause businesses to start spending again?” asked Aaron Smith, senior economist at Moody's Economy.com. Over all, the spending dropped 1% or $102.4 billion in December.

Connection
The connection to the chapter is about how spending can change when households increase the amount of money they save. In this case, American households were saving money by not spending it on goods and services. If household savings increase, then the amount of money sent to the business sector in the circular flow would be reduced. Therefore, businesses react by cutting back on production and laying off workers. The loss of employment reduces the flow of money back to the households. With less money available, households will cut back on their spending.

Reflection
The purpose why American consumers are saving more than spending can have many factors. It may be because companies cut their jobs and they declined their investments in machinery. This loses their interest in spending which affects the economy. Although savings had a negative impact in this article, there is a positive side towards it as well. It can benefit investments by being lent to businesses. With more savings, it can help to lower interest rates and create more employment opportunities.