Download Economic Changes and Cycles

Economic Changes and Cycles
Chapter 12
Economics
Inflation & Deflation
Section 1
Do Now
• Each student will need a textbook today.
• Take out paper and the business cycle reading.
Objective
• Learn about inflation, deflation, hyperinflation,
and the consequences (negative & positive) of
both.
Inflation - Review
• Inflation is an increase in the price
level.
• Measured by the change in the CPI.
▫ A positive change = inflation.
▫ A negative change = deflation.
Effects of Hyperinflation in Zimbabwe
Demand-Side Inflation
• When the inflation originates on the
demand side.
• Example: An increase in the money
supply causes prices to rise.
Supply-Side Inflation
• Example of a cause: A drought lowers the output
of food goods.
Effects of Inflation
• People on fixed incomes are especially hurt by
inflation.
• Savers need to look for investments that beat
inflation. Banks respond by increasing interest
rates on savings accounts.
• Turns past decisions into mistakes.
Effects of Inflation
• People try to hedge against inflation so resources
get diverted away from being used to produce
goods & services.
▫ Hedge: To try to avoid or lessen a loss by taking
some counterbalancing action.
Deflation
• Deflation: A decrease in the price level.
Demand-Side Deflation
• When aggregate demand decreases & aggregate
supply stays the same.
▫ Example of a cause: A decrease in the money
supply.
Supply-Side Deflation
• When aggregate supply increases & aggregate
demand stays the same.
▫ Example: Technology advancements increase
productivity.
An Effect of Deflation
• Costs don’t always fall right away.
• This means products are more expensive for
firms to produce.
• Therefore, firms go out of business.
The Business Cycle
The Business Cycle
• Business cycle: Recurrent swings in real GDP.
Phases of the Business Cycle
1. Peak
▫
▫
The high point
Real GDP is at a temporary high
2. Contraction
▫
▫
Real GDP decreases
If real GDP decreases for two consecutive quarters,
the economy is said to be in recession.
3. Trough
▫
▫
The low point in real GDP
Happens just before it begins to rise
Phases of the Business Cycle
4. Recovery
▫
Real GDP is rising
5. Expansion
▫
Increases in real GDP beyond the recovery
Economic indicators
• Leading indicators – occur before the stage
▫ Example: stock market
• Coincident indicators – happen during the stage
▫ Example: GDP
• Lagging indicators – happen at the end of the
stage
▫ Example: unemployment rates
Economic Growth
Causes of Economic Growth
•
•
•
•
•
•
Natural resources
Labor
Capital
Human capital
Technological Advances
Incentives
Rule of 72
• Number of years for a variable to double
• Rule of 72 = 72/growth rate
Rule of 72 Examples
1. You have $2,000 in a CD earning 3%
annual interest. How many years until the
principal doubles?
2. You have $3,789 in a savings account
earning 2% annual interest. How many
years until the principal doubles?
3. You have $5,500 in a CD earning 7% annual
interest. How many years until the principal
doubles.