1. 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

2. 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

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

4. 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

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

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

7. 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

8. Monetary POLICY FISCAL POLICY
2 Types
2 Tools
Goal:

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

10. The U.S. Income Tax System

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

12. Practice Free Response

13. 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

14. 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!

15. 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!

16. 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