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Tag Archives: elasticity

Two articles caught my eye this morning, one on plans for the Federal Reserve to tighten money growth as recovery allows, another on the growth of the US trade deficit.

I was surprised that the trade deficit had grown lately, thinking that lower exchange rates had already boosted US exports. In fact, that has happened, but the growth in oil imports has overwhelmed the export growth in heavy machinery and commercial airplanes. It is predicted that deficits may continue to grow as American incomes grow and import demand increases.

But how will the Fed’s plans affect that?

Bernanke said the Fed will likely start to tighten credit by boosting the interest rate it pays banks on money they leave at the central bank. Doing so would raise rates tied to commercial banks’ prime rate and affect many consumer loans. Companies and ordinary Americans would pay more to borrow.

Initial response is that borrowing will decrease and import demand–for better or worse–will probably decrease as well. But what happens to the interest income? Just a thought, but if the interest elasticity is inelastic (< 1), the actual quantity of debt will increase with higher rates.

The point of the rate hike is said to be controlling inflation, but what if the rate hike brings more money into circulation?

There is likely a mistake in my thinking here. Please point out my mistakes.

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gourmet-magazineGourmet magazine is getting shut down. Worth a mention here mostly because my mother is a long-time subscriber. I don’t know how many meals she has prepared using recipes she found there, and she enjoys trying those new dishes, not just your meat-and-potatoes kind of meals.

On the economics side, we can probably classify this as a luxury good. As incomes have fallen over the last 18 months or so, people will budget much less for non-necessity goods. (I think my mom considers Gourmet a necessity good, but most people would not.) The article focuses on advertising revenue, down by 43%, almost three times the drop in American incomes, so clearly income elasticity is greater than one.

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