Transcript Inflation & Deflation

Inflation & Deflation
Reference 13.1 and 13.2
Aggregate=all together
• Aggregate demand and aggregate supply
considers the entire quantity of goods and
services in an economy.
• The equilibrium price in aggregate supply
and demand curves is called the price level.
S1
D1
Price Level
Q
Inflation / Deflation
What is it?
an increase in the price level
a decrease in price level
How is it determined?
CPI= Consumer Price Index
by comparing the CPI in different years and
noting the change
CPI is higher=inflation
CPI is lower=deflation
• Last year’s CPI (based on 1984 prices)
$216.17
• This year’s CPI
$218.70
• Inflation rate
3.82%
Inflation rate = (CPI later year – CPI earlier year) ÷ CPI earlier year
Can be caused by
supply-side shifts or demand-side shifts
woohoo!!
more people!!
more money!!
• Under what conditions would you expect
to see inflation (rise in price level)?
Inflation can be caused by an increase in aggregate demand
Inflation can be caused by a decrease in aggregate supply
• Under what conditions would you expect
to see deflation (fall in price level)?
Deflation can be caused by a decrease in aggregate demand
Deflation can be caused by an increase in aggregate supply
Simple Quantity Theory of Money
• If velocity and quantity of output (supply)
are constant, more money in circulation
leads to higher prices.
What does velocity mean?
velocity=the average number of times per year
a dollar is spent to buy final goods
Simple Quantity Theory of Money
• If velocity and quantity of output (supply)
are constant, more money in circulation
leads to higher prices.
MxV=PxQ
M = money supply
V = velocity
P = price level
Q = quantity of output
% change M = % change P
Inflation Rates between 1952 and
2008
• Low levels of unemployment are
frequently periods of higher inflation
More working people
with
more money
(increase in aggregate demand)
remember
Monetary Policy?
• The goal is to maintain price stability and
low unemployment.
Monetary Policy
• Fed is responsible for maintaining price
stability and employment
• “Expansionary Monetary Policy”
– goal is to increase money supply
• to reduce unemployment
• to avoid deflation
• “Contractionary Monetary Policy”
– goal is to decrease the money supply
• to reduce inflation
So What?
• Negative Effects of Inflation
– hurts people on fixed incomes (the retired)
– hurts savers
– hurts lenders (helps debtors)
– hurts people who contract to be paid in the future
– makes financial decision making more difficult
• hedging = avoiding or lessening a loss by taking a
counterbalancing action.
– buy gold or some other store of value besides money
So What?
• Negative Effects of Deflation
– Great Depression!
– uneven fall in prices
• business failures
• job loss
– hurts debtors
– hurts property-owners
Stagflation
What’s up with that?
• stagnant (persistently high) unemployment
and
• inflation
1970’s US and other industrialized nations experienced stagflation
• erratic monetary policy: stop-and-go, on-and-off
• supply shocks (OPEC)
Review
• What are some possible causes of
inflation?
• What are some possible causes of
deflation?
• Why is the relationship between
unemployment and inflation usually
inverse?
• Why is inflation a problem?
Review
• How does the “the fed” use monetary
policy to control inflation?
Homework
• Read Chapter 14 Business Cycles and
Economic Growth pps. 364-386
– Complete Review Sections p.386-387
• Economics Vocabulary (writing complete sentences)
• Review Questions
• Analyzing Primary Sources
– Be prepared to take a chapter quiz
Today’s Exit Pass
• In a small group, read 13.3
“Unemployment”
• Section Review p. 359
• #1 Definitions
• #2-3 (complete sentences)