Oil Prices and the Economy (Chapter 12)
Oil prices have always had drastic effects on the American and global economy. Since the 1970s oil shocks, economists have considered oil prices to be key influential factors within the global economy because of their ability to cause fluctuations. The oil shocks of the 1970s caused an increase in unemployment, stunted the growth in many countries and raised the level of inflation significantly. However, the past two decades have seen the fluctuations in oil prices become less influential on the economy of the world and the United States. These effects were mainly the result of the nation’s dependency on oil as a source of energy. Accordingly, any increase in the price of oil made production more costly. Producers then transferred these costs to the consumers leading to an increase in inflation. The impact of these shocks also forced producers to downsize their companies leading to high unemployment and low production. However, these effects were largely the result of overreactions to a previously unknown phenomenon. The actions that economists and companies took because of the oil shocks between the 1970s and 1990s are likely to have worsened the situation. Accordingly, oil shocks are becoming less important to the American economy, but only because policy makers now know how to handle them. In the twenty-first century, the focus has now shifted to monetary policies, which have become much more effective and important than the fluctuations in oil prices.
Policymaker Reputations (Chapter 16)
Economic policymakers normally have two reputations. Conservative policymakers prefer to avoid the high inflation trap because they believe that the cost of inflation is higher than the benefits of increased production. Conversely, other policymakers prefer to pursue higher production at the cost of an increase in inflation. This is because they are more oriented towards achievements made in the short-term. The conservative policies are a better option because they strive to keep inflation at a low level. This is because the low inflation sets the stage for a stronger economy in the future. By keeping the inflation low, the conservative policymakers ensure that the economy will remain stable, thus setting the stage for future growth and lower debt. Contrastingly, high inflation coupled with increased production only reflects positively in the short term. Though the economy may look like it is growing, the effects are later worn down by the high inflation and the efforts undertaken to control it. Accordingly, it is better for an economy to avoid the high inflation trap using policies from conservatives.
The Euro Area (Chapter 17)
In 2011, members of the Euro Area were Finland, Germany, France, Belgium, Italy, Cyprus, Greece, Ireland, Netherlands, Austria, Slovenia, Slovakia, Slovenia, Portugal, Spain, Luxembourg, Malta and Estonia. Since then, Latvia is the only other state that has joined the Eurozone, which it did in 2014. However, several other European Union states will inevitably join the Eurozone after they have met all of the requirements. Prior to joining the Eurozone, a country has to be a member of the European Union and take part in the European Exchange Rate Mechanism (ERM II) for a minimum of two years. After taking part in the ERM II, a country is then obliged to join the Eurozone. In accordance, with these rules, Lithuania is bound to join the Eurozone, which it will do in January 2015. Poland, Bulgaria, Romania, Hungary and the Czech Republic will soon join the ERM II. This means that the five states will eventually become a part of the Eurozone. For other countries, their absence from the Eurozone has been a result of their own choices. The UK and Denmark are received special exemptions when the European nations were establishing the union through the Maastricht Treaty. Both countries can join the Eurozone whenever they want to. Sweden is also exempted from joining the Eurozone, a status it achieved by taking advantage of a legal loophole. It will be obliged to join the Euro Area after it meets the requirements, but the nation has so far avoided joining the ERM II.