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Economic Changes and Cycles

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Presentation on theme: "Economic Changes and Cycles"— Presentation transcript:

1 Economic Changes and Cycles
Chapter 12 Economics

2 Inflation & Deflation Section 1

3 Do Now Each student will need a textbook today.
Take out paper and the business cycle reading.

4 Objective Learn about inflation, deflation, hyperinflation, and the consequences (negative & positive) of both.

5 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.

6 Effects of Hyperinflation in Zimbabwe

7 Demand-Side Inflation
When the inflation originates on the demand side. Example: An increase in the money supply causes prices to rise.

8 Supply-Side Inflation
Example of a cause: A drought lowers the output of food goods.

9 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.

10 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.

11 Deflation Deflation: A decrease in the price level.

12 Demand-Side Deflation
When aggregate demand decreases & aggregate supply stays the same. Example of a cause: A decrease in the money supply.

13 Supply-Side Deflation
When aggregate supply increases & aggregate demand stays the same. Example: Technology advancements increase productivity.

14 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.

15 The Business Cycle

16 The Business Cycle Business cycle: Recurrent swings in real GDP.


18 Phases of the Business Cycle
Peak The high point Real GDP is at a temporary high Contraction Real GDP decreases If real GDP decreases for two consecutive quarters, the economy is said to be in recession. Trough The low point in real GDP Happens just before it begins to rise

19 Phases of the Business Cycle
4. Recovery Real GDP is rising 5. Expansion Increases in real GDP beyond the recovery

20 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

21 Economic Growth

22 Causes of Economic Growth
Natural resources Labor Capital Human capital Technological Advances Incentives

23 Rule of 72 Number of years for a variable to double
Rule of 72 = 72/growth rate

24 Rule of 72 Examples You 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.

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