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Transcript
Inflation & Deflation Reference 13.1 and 13.2 Aggregate=all together • Aggregate demand and aggregate supply considers the entire quantity of goods and services in an economy. • The equilibrium price in aggregate supply and demand curves is called the price level. S1 D1 Price Level Q Inflation / Deflation What is it? an increase in the price level a decrease in price level How is it determined? CPI= Consumer Price Index by comparing the CPI in different years and noting the change CPI is higher=inflation CPI is lower=deflation • Last year’s CPI (based on 1984 prices) $216.17 • This year’s CPI $218.70 • Inflation rate 3.82% Inflation rate = (CPI later year – CPI earlier year) ÷ CPI earlier year Can be caused by supply-side shifts or demand-side shifts woohoo!! more people!! more money!! • Under what conditions would you expect to see inflation (rise in price level)? Inflation can be caused by an increase in aggregate demand Inflation can be caused by a decrease in aggregate supply • Under what conditions would you expect to see deflation (fall in price level)? Deflation can be caused by a decrease in aggregate demand Deflation can be caused by an increase in aggregate supply Simple Quantity Theory of Money • If velocity and quantity of output (supply) are constant, more money in circulation leads to higher prices. What does velocity mean? velocity=the average number of times per year a dollar is spent to buy final goods Simple Quantity Theory of Money • If velocity and quantity of output (supply) are constant, more money in circulation leads to higher prices. MxV=PxQ M = money supply V = velocity P = price level Q = quantity of output % change M = % change P Inflation Rates between 1952 and 2008 • Low levels of unemployment are frequently periods of higher inflation More working people with more money (increase in aggregate demand) remember Monetary Policy? • The goal is to maintain price stability and low unemployment. Monetary Policy • Fed is responsible for maintaining price stability and employment • “Expansionary Monetary Policy” – goal is to increase money supply • to reduce unemployment • to avoid deflation • “Contractionary Monetary Policy” – goal is to decrease the money supply • to reduce inflation So What? • Negative Effects of Inflation – hurts people on fixed incomes (the retired) – hurts savers – hurts lenders (helps debtors) – hurts people who contract to be paid in the future – makes financial decision making more difficult • hedging = avoiding or lessening a loss by taking a counterbalancing action. – buy gold or some other store of value besides money So What? • Negative Effects of Deflation – Great Depression! – uneven fall in prices • business failures • job loss – hurts debtors – hurts property-owners Stagflation What’s up with that? • stagnant (persistently high) unemployment and • inflation 1970’s US and other industrialized nations experienced stagflation • erratic monetary policy: stop-and-go, on-and-off • supply shocks (OPEC) Review • What are some possible causes of inflation? • What are some possible causes of deflation? • Why is the relationship between unemployment and inflation usually inverse? • Why is inflation a problem? Review • How does the “the fed” use monetary policy to control inflation? Homework • Read Chapter 14 Business Cycles and Economic Growth pps. 364-386 – Complete Review Sections p.386-387 • Economics Vocabulary (writing complete sentences) • Review Questions • Analyzing Primary Sources – Be prepared to take a chapter quiz Today’s Exit Pass • In a small group, read 13.3 “Unemployment” • Section Review p. 359 • #1 Definitions • #2-3 (complete sentences)