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2. Inflation and Deflation12
Section 1
Inflation and Deflation
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3. What Is Inflation?
Inflation is an increase in the price level, or the average level of prices.
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4. How Do We Measure Inflation?
If the price level increases from one year to the next, the economy is experiencing inflation.
For example, if the CPI increases from 230 in one year to 235 in the next year, the inflation rate is 2.17 percent.
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5. Demand-Side Versus Supply-Side Inflation
Inflation can originate on either the demand side of the economy or the supply side of the economy. If aggregate demand increases and aggregate supply stays the same, inflation will occur.
Demand-side
Demand pull inflation.
Supply-side inflation
Cost push inflation
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6. The Simple Quantity Theory of Money
The simple quantity theory of money presents a clear picture of what causes inflation.
To understand this theory, you need to understand velocity and the exchange equation.
M x V = P x Q
Money x Velocity = Price x Quantity
Velocity is the average number of times a dollar is spent to buy final goods and services in a year.
Changes in M x V must = Changes in P x Q
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7. Exhibit 12-5 from the Student Text
M x V = P x Q
M = Money supply
V = Velocity
P = Price level
Q = Quantity of output
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8. The Effects of Inflation
Inflation reduces the buying power of people on fixed incomes
savings accounts loses value.
Eats up profits or retained earnings for future investments
Hedge against inflation: buy gold, real estate, art, etc.
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9. What Is Deflation? Opposite of inflation
Deflation is a decrease in the price level, or the average level of prices.
A downward change in the CPI indicates deflation.
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10. Demand-Side Versus Supply-Side Deflation
Like inflation, deflation can result from a change in price or a change in supply.
Drop in AD
Drop in SRAS
Example: Housing prices in during the Great Recession
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11. 12
Section 2
Business Cycles
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12. What Is a Business Cycle?
A business cycle includes recurrent swings (up and down) in real GDP of an economy.
Economists usually talk about five phases of a business cycle.
Peak.
Contraction.
Trough
Recovery
Expansion
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13. Exhibit 12-7 from the Student Text
Business cycles can be caused by several types of events:
Changes in money supply
Changes in business investment, residential construction, and government spending
Politics
Innovation
Dramatic changes to supply
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14. What Causes Business Cycles?
Between 1945 and 2005, the United States went through 10 business cycles.
What causes a business cycle?
changes in the money supply.
changes in business investment, residential construction, or government spending
Political decisions
Drastic changes in supply
Innovation
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15. 12
Section 3
Economic Growth
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16. What Is Economic Growth?
Absolute real economic growth is an increase in real GDP from one period to the next.
Per capita real economic growth is an increase in per capita real GDP from one period to the next.
Per capita real GDP is real GDP divided by population.
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17. Per Capita Real GDP Growth and the Rule of 70
The Rule of 70 states that the amount of time it would take for any variable to double is equal to 70 divided by the variable’s percentage growth rate.
For example, if a variable is growing at 10 percent, it will double in 7.0 years: 70 divided by 10 equals 7.0.
Rate of Growth / 70
10% / 70
= 7 years
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18. Production Possibility Curve
Economic growth can occur from a position below the PPF as shown in part (a), or a position on the PPF as shown in part (b).
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19. What Causes Economic Growth?
natural resources, labor, capital, human capital, technological advances, and incentives.
more labor or increased skill of labor force.
Capital investment
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20. What Causes Economic Growth? (cont.)
Human capital is the knowledge and skill that people use in the production of goods and services.
Human capital includes honesty, creativity, and perseverance—traits that lend themselves to finding work.
Technological advances can make it possible to obtain more output from the same amount of resources.
Technological advances may result from new capital goods or new ways of producing goods. .
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21. Two Worries About Future Economic Growth
COST:
pollution,
more factories,
crowded cities, along with increased social and psychological issues.
FUTURE: no clean air or water, and no land for people to live on comfortably?
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22. Evaluating Data for Bias
The speaker’s point of view
frame of reference,
can change how the information is presented and interpreted.
Always evaluate and analyze economic information to identify any existing bias. Consider point of view and frame of reference when you look for bias in presented data.
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