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Vernon L.
The Political Teenager
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European History
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Question:

The following is an excerpt from a document a classmate and I created of all the definitions of concepts, people, and objects discussed in the AP European History course. A typical definition looks like: Define Sigmund Freud

Vernon L.
Answer:

Sigmund Freud: One of the most prominent psychologists of the 20th century also known as the Father of Modern Psychology. Freud divided the brain into three main parts: ID, Ego, and Superego. The ID was the largest part of the brain and was dominated by physical and biological needs and desires; he considered this part of the brain to be greedy and selfish. In addition, he believed the ID provided the motivation for an individual to get things done. The Ego is the conscious or rational part of the brain and it was said to begin to develop in infancy to counterbalance the ID’s selfish desires. Finally, superego develops from when a person is three to six years old and represents the moral aspect of your brain. Freud saw people as irrational animals and hypothesized that without morality or authority, humans would act on their natural barbaric impulses. This helped support the increase in government power around the world; authoritarians such as Hitler used Freudian Psychology to support the ideal that the government knows what's best for the common man.

Microeconomics
TutorMe
Question:

What is the true cost of water when one takes into account the negative consumption externality of current water usage in the U.S.?

Vernon L.
Answer:

True Cost of Water Governments have taken aim on everything from soda to carbon emissions; when one thinks of a severe externality one usually thinks of these things. However, government is failing to solve the most significant negative externality of all: the over-consumption of water. Water, seeming to be infinite, is severely undervalued in today’s society; if society keeps consuming water at the rate we are doing today, demand for water will exceed supply by 40% by 2030. Such an issue is dire and must be fixed if society wishes to survive beyond this century. Some basic definitions of the following economic terms will better put this issue into context. A negative externality of consumption is the negative impact on a third party (society) due to the consumption of a particular good, in this case water. Market failure is the term used to describe the situation when the marketplace fails to allocate resources properly, in this case, water is being misallocated in the marketplace because it is being over-consumed. Inelastic demand means that consumer demand for a particular good (water) is not responsive to a change in price; this concept will be critical in formulating a solution to the externality later on. The article above, The True Cost of Water by Libby Bernick, goes in-depth into the current situation at hand. In the opening line of the article Bernick states that “The environmental and social costs of global business water use add up to around $1.9 trillion per year”; that’s an enormous externality that will require a substantial policy solution to correct. The magnitude of the externality, in fact, is the most fighting part of the externality in terms of impact; shortly after the opening line Bernick continues to make statements such as “Just last year, the worst drought in the United States in 50 years sent commodity prices skyrocketing” and “most raw materials that businesses depend on require water”. If, as Bernick implies, the global economy is truly dependent on water to such an extent then this will be, in fact, the worst externality in human history. Not only that, this problem will affect all stakeholders involved, which is essentially all of society. Furthermore, this problem will explode in the long term; in the short term the problem will be relatively manageable but will continue to get worse over time. In our current situation, society is consuming significant amounts of water but at the same time is receiving it at artificially low prices. This phenomenon can be explained by the simple fact that current methods used to price water by the world’s leading governments and utility companies are simply outdated and inadaptable to change. The “potential welfare loss”, the amount of resources lost due to this externality, amounts to $1.9 trillion per year and this amount will only multiply in the years to come. water is not (relatively) responsive to great increases in price, therefore making it inelastic. Now since water is deemed to be inelastic, it is now viable to put a tax or regulation on its usage in order to increase government revenue that can then be used to improve water-saving technologies. Inelasticity is critical to the inter-workings of this plan. In addition to this, some basic measures must be taken. First, the methods used to price water must be modernized in order for it to more accurately represent supply and internalize the externality. In the long term, a water-trading scheme, such as the successful ones currently used in Australia and New Zealand, will have to be implemented; essentially, it will be necessary to create a tradable market for water. Only these solutions will be able to dramatically reduce the effects of this externality in the future.

Macroeconomics
TutorMe
Question:

What would the potential transition from expansionary to contractionary monetary policy in the U.S look like?

Vernon L.
Answer:

The Potential Transition from Expansionary to Contractionary Monetary Policy in the U.S The Federal Reserve, once again, is now deliberating whether to raise interest rates from the 2008 low of zero percent. The U.S. economy has now reached a point where full-throttle expansionary policy seems unnecessary. Unemployment has gone down to near full-employment at 5.1%. However, the Federal Reserve may not raise rates due to the volatility of the stock market and the economic recovery; if they do, it will mark a transition from expansionary to contractionary monetary policy, which will have significant implications for investment and aggregate demand. In order to understand the topic, some basic terms must be defined. Expansionary monetary policy is when the central bank increases the money supply while Contractionary monetary policy is when they seek to decrease the money supply; both policies require the manipulation of interest rates, which refers to the “price of money” determined by three functions: the reserve requirement, bonds, and the discount rate. Interest rates determine how much money individuals accrue from savings and the price of borrowing money; so, a lower interest rate leads to more borrowing while a higher one promotes savings. Aggregate demand is the total level of society’s willingness and ability to consume goods and services in the economy. Higher interest rates tend to lower the level of aggregate demand in society since it promotes savings and, in some cases, leads to deflation. Cleary, there are consequences for raising interest rates, but keeping interest rates at this level can lead to malinvestment, the situation that arises when investors make riskier investments, leading to market bubbles and therefore market crashes. This concept is especially important in Austrian theory where it is believed low interest rates for prolonged periods of time leads to risky investing, similar to the subprime mortgage crisis in 2008. An understanding of these topics will allow a fair and balanced analysis of the merits of raising interest rates. Jon Hilsenrath states in his WSJ article that “The Fed pushed its benchmark short-term interest rate to near zero in December 2008” in order to maintain a fragile economic recovery. In the Fed’s eyes, low interest rates are necessary to promote the current level of borrowing, spending, and investment that we currently see in the United States. However, critics of the Fed’s policies of “easy money” or “quantitative easing” note, as in the article, “the job market is improving at a rapid pace and reducing economic slack.” Because of this, the Federal Reserve is facing significant pressure from its board members to begin increasing rates. High interest rates, at best only in the short run, reduces aggregate demand, leading to less consumer spending which can reduce the growth potential of the country. Producers will receive less revenue, which will force them to cut wages or lay off workers, leading to a deflationary gap. Furthermore, high interest rates can deter investment in a political climate where business is facing an increasingly higher burden of regulations and taxes. On the contrary, there are potentially dire consequences for continuing low interest rates for a long period of time. Prolonged low interest rates leads to a lack of savings, making more people prone to debt and more dependent on government entitlement programs and welfare. In the end the decision to rate rates at this time would be a foolish one. It would reduce aggregate demand, possibly leading to deflation, and further disincentivizing spending, borrowing, and investment in a country where it is becoming increasingly difficult to run a business. However, the Fed will have to raise interest rates soon in order to help build people’s savings and furthermore protect against malinvestment, which could cause another recession within the coming years.

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