Chapter 12 PowerPoint

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Economic Changes and Cycles
Chapter 12
Inflation & Deflation
Section 1
Do Now
• Each student will need a textbook today.
• Take out paper and the business cycle reading.
• Learn about inflation, deflation, hyperinflation,
and the consequences (negative & positive) of
Inflation - Review
• Inflation is an increase in the price
• Measured by the change in the CPI.
▫ A positive change = inflation.
▫ A negative change = deflation.
Effects of Hyperinflation in Zimbabwe
Demand-Side Inflation
• When the inflation originates on the
demand side.
• Example: An increase in the money
supply causes prices to rise.
Supply-Side Inflation
• Example of a cause: A drought lowers the output
of food goods.
Effects of Inflation
• People on fixed incomes are especially hurt by
• Savers need to look for investments that beat
inflation. Banks respond by increasing interest
rates on savings accounts.
• Turns past decisions into mistakes.
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.
• Deflation: A decrease in the price level.
Demand-Side Deflation
• When aggregate demand decreases & aggregate
supply stays the same.
▫ Example of a cause: A decrease in the money
Supply-Side Deflation
• When aggregate supply increases & aggregate
demand stays the same.
▫ Example: Technology advancements increase
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.
The Business Cycle
The Business Cycle
• Business cycle: Recurrent swings in real GDP.
Phases of the Business Cycle
1. Peak
The high point
Real GDP is at a temporary high
2. Contraction
Real GDP decreases
If real GDP decreases for two consecutive quarters,
the economy is said to be in recession.
3. Trough
The low point in real GDP
Happens just before it begins to rise
Phases of the Business Cycle
4. Recovery
Real GDP is rising
5. Expansion
Increases in real GDP beyond the recovery
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
▫ Example: unemployment rates
Economic Growth
Causes of Economic Growth
Natural resources
Human capital
Technological Advances
Rule of 72
• Number of years for a variable to double
• Rule of 72 = 72/growth rate
Rule of 72 Examples
1. You have $2,000 in a CD earning 3%
annual interest. How many years until the
principal doubles?
2. You have $3,789 in a savings account
earning 2% annual interest. How many
years until the principal doubles?
3. You have $5,500 in a CD earning 7% annual
interest. How many years until the principal