What are the three (3) functions of prices in organizing economic activity? Explain each of these functions.
Price is the best and only source for organizing economic activity. There are three major functions of prices in organizing economic activity: “first, they transmit information; second, they provide an incentive to adopt those methods of production that are least costly and thereby use available resources for the most highly valued purposes; third, they determine who gets how much of the product—the distribution of income. The transmission of information is only passed and used by those who need it. It also produces incentive and provides the ability for those to act upon the information. The producer input vs. output is reason they would act on the information ties into income.
There are a few key reasons a producer would react to this info. It lies more into the distribution of information. Production efficiency offers them to find the cheapest source of production and utilize it to increase profits. Output is also another reason they may react. If to much is produced profit will decrease. Decreased sales due to increased prices will cause a decrease in profit. This reason explains distribution of income.
Friedman defines income as “the difference between his receipts from the sale of goods and services and the costs he incurs in producing those goods and services.” Employees earn about “3/4 of all income generated in the U.S. through market transactions.” Production of Human Capital, “personal productive capacity,” enforces physical capital which is the importance of this high amount of dollar. Physical capital provides people with the correct tools to get a job done. The two intertwine and have enabled America to increase its physical capacity for many years.
After a severe recession, The Federal Reserve Act was created in 1913.The Federal Reserve System is the central banking system of the United States. Carter Glass rewrote the Federal Reserve System that has served as the monetary authority of our country ever since. In the Federal Reserve Act, allowing banks to convert their assets to fast cash through an emergency printing press is a common way to prevent panic. That is exactly what the Federal Reserve did in the beginning. They kept printing money to loan to other banks. There were twelve regional banks established that operated under the Federal Reserve Board of Washington. These banks acted as “lenders of Last resort” for other banks. They had the ability to loan printed currency (Federal Reserve notes) or by loaning deposit credits that had to be kept track of.
The problem was that they were lending money but not getting anything back. Because of that, The Federal Reserve changed the promissory note to start charging banks interest on those loans. People were holding their money and taking it out of the banks in fear of rumors of banks going down. So After another panic in the 1930’s, The Federal Reserve adopted the Federal Deposit Insurance Corporation to really help prevent these panics by guaranteeing the safety of one’s deposit.
Bonds were sold between banks and the Federal Reserve. When banks sell bonds or the seller of a bond uses that bank as the depository that bank has a larger reserve. If the Federal Reserve sells bonds the reserves for the commercial banks decline. The Federal Reserve use to be committed to creating an amount of currency or deposits depending on the amount of gold in that system. Now the amount created depends on the person in charge of the system. The Federal Reserve act was based on the Gold standard when Great Britain was the base of money in the world but when the U.S gained that privilege it changed to the dollar amount economy. This led the Reserve to print more money to fund the war. The Federal Reserve bought more bonds to support the war which made the bank reserves greater and allowed more banks to expand. This did no t prevent inflation but lessened the fear of it. They did not realize what they had done until later. Because of all the money that was printed/ inflation it caused and the government not being able to pay for the war caused our economy to plunge into a deep long depression.
Comment on this statement - “[World War II’s] effect on public attitudes was the mirror image of the [Great] Depression’s. The [Great] Depression convinced the public that capitalism was defective; the War, that centralized government, was efficient.”
The Great Depression caused people to lose faith in the government. People had a negative attitude about the way things were being run and the quality of life. People were jobless, hungry, and some homeless. Life was very hard and people were unhappy. During World War II most people reflected the same attitude they had towards the government during the Great Depression. People were being lied to and we were not winning. The government was being looked down upon. Many wanted to pull out of the war and were not getting what they wanted. The moral and pride decreased toward the US and Government during much of the war.
The Great Depression convinced people that capitalism was a failure. The government had got them into the Depression by inflation and irresponsible spending/governing. They did not believe that having the government was effective. Leaving the small portion to make decisions for all had so far shown no help to the problems the US were facing. World War II on the other hand showed to be more beneficial. It pulled the US out of the Depression by adding more jobs that allowed people to work. Although the war was a struggle it centralized the government by showing that they could make good decisions and bring people closer with them. The government made smart moves that helped the US get to where it is today and without the war the US may have not made it out of the Depression.
The attitudes toward the government and US moral were very similar during the Depression and WWII. A lot of negative and hopelessness was showing in Americans. Having faced all these problems has brought the US closer and made the government more centralized. People still have doubts in the government but they are more hopeful and positive about our government today. I personally think this quote when first read can seem very confusing but with some thought and understanding it is a very good statement with meaning behind it.
Comment on this statement - “Government measures that promote personal equality of opportunity enhance liberty; government measures to achieve ‘fair share for all’ reduce liberty.”
Liberty is the state of being free. There is no person or thing that can tell you how to live your life. There is no governmental control over who you marry, what your occupation is, where you live, etc. Once a government creates certain regulations every individual’s freedom has been reduced. This infringement can be produced due to lack of promotion of personal equality. If people are given personal equality they have more liberty to choose for themselves. They can choose to become something of interest in their life rather than being forced to work in factory. People will tend to be more assertive and happier with this type of lifestyle.
When a government promotes this type of egalitarianism there is more freedom. Everyone has the choice to be who they want to be and the government encouraging that idea. They support the freedom of choice. Every individual can decide where or not they are going to graduate from high school, get a career in that field, or start a family, and so on. These individuals have the opportunity to make a life for themselves. Giving them true Liberty!
In comparison, when a government enforces “fair share for all” freedom is condensed. They government must follow a more strict structure. In order to give everyone equal share they must better regulate it. Things are more set in stone. People would not get the opportunities we have to choose for ourselves and become what we want. Sometimes we take this for granted. I realize when reading this statement how much liberty I really have as an American.
Why inflation is a printing press phenomenon?
The printing press phenomenon is suggested to be what cause the inflation. There is no actual “one-to-one correspondence” of degree of inflation to amount of dollars. Although, every scenario of inflation every recorded insists otherwise. Every time the quantity of dollars was dramatically increased there followed an intense inflation. This topic is very understood throughout economics and there are plenty of examples in history that would prove all other accusations incorrect. For example right after the war and before the great depression we printed money freely during the war causing high inflation and The Great Depression.
The government tried to blame business men, monopolies, and other nations as a tactic to share the burden. The nation only struggles when this happens for a temporary amount of time. Hiking wages and prices are blamed on monopolies. Business men are not brutally selfish and only charge more because of an outside power. Other countries cannot be to blame because we all suffer from inflation at various rates and times. No country really has control over inflation.
Inflation can be determined when more money rises rapidly than its output. Creating “monetary phenomenon” money is being printed way faster than any of it can be used in a proper manor. Money is monitored through a more complicated process of book keeping. There are no physical limits to money. A printing press has everything to do with inflation because there are no boundaries. Dollars can grow at any rate but output is very slow and has a lot of dependents. Friedman summed it all up very well by stating, “Quantity of money tend to dwarf what happens to the output.” The printing press controls the economy in so many ways and can affect us Americans greatly for good and bad.