2-Types of Inflation Demand-Pull Inflation: Cost-Push Inflation Too many dollars chasing too few goods Demand Side Inflation Cost-Push Inflation Increase in cost of any factors of production examples: price of oil, wages, steel, etc…. Supply Side Inflation

Who is Helped by inflation? People in large amount of Debt Large Mortgages, Car Loans, Student Loans If you owe 1 million dollars Inflation lets you pay your debt back in inflated dollars

Who is Hurt by Inflation? People on a fixed income If you receive $1,000 a month (for life) Inflation lowers your purchasing power

Why is inflation Bad? Difficult for Business to plan & price goods/services Lowers the value of our currency Lowers your purchasing power Leads to lower GDP in the long run

Fiscal Policy & Monetary Policy We do not set interest rates! Fiscal Policy & Monetary Policy Government Test Review

Business Cycle Both Fiscal Policy & Monetary Policy attempt to “smooth” the “ups & downs” of the Business Cycle

AD/AS Model You draw the AD curve on 1-section of the AS curve based on the economic situation AD1 UNEMPLOYMENT 3% GDP TOO FAST Price Level AS1 AD1 UNEMPLOYMENT 5% GDP MODERATE AD1 RECESSION Real GDP

Monetary POLICY FISCAL POLICY 2 Types 2 Tools Goal:

Government Budget Know major spending areas Know how the Government raises money for spending

The U.S. Income Tax System

What creates Economic Growth? GDP GDP GDP INCENTIVES MATTER!!!

Practice Free Response

Free Response Economic Scenario: GDP growth is +6.0%, Unemployment 2%, Inflation is rising Solve the economic problem using Monetary Policy: Draw the graph of the current economy (AD/AS Graph) Explain the type & details of Monetary Policy you would use Graphically show the effect of your policy in the Money Market Modify your AD/AS graph as a result of this change Explain the effect of your policy on Employment Explain the effect of your policy on Inflation

GDP growth at 6.0%, Inflation rising, Unemployment 2.0% Economic Situation: GDP growth at 6.0%, Inflation rising, Unemployment 2.0% Solution: Tight Monetary Policy MS1 MD Interest Rate Qty of $ MS2 Price Level Real GDP AS1 AD1 Affects AD AD2 --------- i2 --------------- i1 End Result: Lower GDP & less inflation!

Use Fiscal Policy to improve the economy Economic Situation: GDP growth at -1.0%, Inflation falling, Unemployment 8% Use Fiscal Policy to improve the economy Price Level Real GDP AS1 AD2 AD1 End Result: higher GDP & same inflation!

Policy Lag & Multiplier Both Fiscal & Monetary policy take time before the result is visible in the economy (1-year or more….) A change in fiscal/monetary policy has a much larger affect on aggregate demand ↑ 10 billion Gov’t Spending => ↑ GDP > 10 billion