So… Olivier Blanchard received the honor of becoming not really my favorite (I wouldn’t go that far) but my most-read author. This is TREMENDOUS honor (I don’t know whether he realizes this or not :P) considering the fact that I have read his book with utmost concentration-like 3 times at least for the passages which I didn’t understand… whereas I haven’t even FINISHED “the Audacity of hope” by Obama (I think he’s a great writer, but I guess his writing just doesn’t do it for me!)
While reviewing for my finals in Macro, I stumbled upon the concept of “Liquidity Trap”
What it is: the liquidity trap, in Keynesian economics, is a situation where monetary policy is unable to stimulate an economy, either through lowering interest rates or increasing the money supply.WOW-that easy huh? BS!!! I spent like 3 hrs of my precious Saturday evening (yes, pity me) just to wrap my head around it.
One interesting finding is (-completely UN-related to macro, I doubt whether this would earn any extra points from Prof. Moon) this:
r=i –
simple math-plug in numbers:
0%-10%=-10% (in words: if nominal interest=0, an inflation rate of 10%=-10% real interest rate where consumption and investment is high, where liquidity trap is unlikely to be a problem)
But
0%-(-5%)=5% (at 0i, inflation of -5% (more like deflation of -5%) =5% real interest rate which is too high to stimulate growth
This could be applied to explain a simple life truth:
Say r=failure, i=success and πe=faith (well, the expected faith??)
i-π=r: Even if you feel like you have 0% success, higher faith will lead to lower (future) failure. However, at a negative faith, you will result in having higher failure. (this works!! Coz it also kinda makes sense to put it this way: Success-faith=failure: success without faith is failure!!!
Wow-‘twas harder than expected to find the analogy that perfectly works for the given equation. But I think that this works okay… J
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