7Demand-Side Inflation When the inflation originates on the demand side.Example: An increase in the money supply causes prices to rise.
8Supply-Side Inflation Example of a cause: A drought lowers the output of food goods.
9Effects of InflationPeople 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.
10Effects of InflationPeople 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.
11DeflationDeflation: A decrease in the price level.
12Demand-Side Deflation When aggregate demand decreases & aggregate supply stays the same.Example of a cause: A decrease in the money supply.
13Supply-Side Deflation When aggregate supply increases & aggregate demand stays the same.Example: Technology advancements increase productivity.
14An 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.
18Phases of the Business Cycle PeakThe high pointReal GDP is at a temporary highContractionReal GDP decreasesIf real GDP decreases for two consecutive quarters, the economy is said to be in recession.TroughThe low point in real GDPHappens just before it begins to rise
19Phases of the Business Cycle 4. RecoveryReal GDP is rising5. ExpansionIncreases in real GDP beyond the recovery
20Economic indicators Leading indicators – occur before the stage Example: stock marketCoincident indicators – happen during the stageExample: GDPLagging indicators – happen at the end of the stageExample: unemployment rates
22Causes of Economic Growth Natural resourcesLaborCapitalHuman capitalTechnological AdvancesIncentives
23Rule of 72 Number of years for a variable to double Rule of 72 = 72/growth rate
24Rule of 72 ExamplesYou have $2,000 in a CD earning 3% annual interest. How many years until the principal doubles?You have $3,789 in a savings account earning 2% annual interest. How many years until the principal doubles?You have $5,500 in a CD earning 7% annual interest. How many years until the principal doubles.