Inflation
3 Causes of Inflation
What is / are:
Expectations that prices will increase in the future
Increases in demand
Too much money in circulation
Increases in raw material costs
Increases in labor costs
The Calculation for Aggregate Demand / GDP
What is C+I+G+N-M?
(Double Points if you know what the letters stand for)
Fiscal Policy / Policies
What are Government actions with regard to government spending and taxes in order to impact the economy?
Starting in January of 2020, all companies have had to file monthly IRS forms listing all company expenditures higher than 500$.
What is a regulation which results in shifting the AD curve to the left, generally increasing prices, and declining GDP?
The rise in general level of prices
What is Inflation?
Determinants of Aggregate Supply
(For Domestic and Imported Goods)
Expansionary and Contractionary
What are the two types of Fiscal Policy?
Real interest rates decrease from 9% to 6%.
Cost Push Inflation
What is inflation created when input costs go up. This makes the AS curve shift left, increasing prices, decreasing GDP (as people buy less).
Determinants of Aggregate Demand
What are:
C: Consumer Spending: Wealth; Expectations;
Debt; Taxes.
I:Investment Spending: Real Interest Rates and
Expected Returns are the two driving forces in
Investment Spending.
G: Government Spending: Increase or
decrease in Government purchases
X: Net Export Spending: National Income
Abroad; Exchange Rates
N: Remember to subtract imports
Fiscal Policy Options the governments has to fight Cost Push Inflation
What is lowering businessmen taxes (input costs!) or improving productivity by reducing regulations (economy, # of allowed work hours, child labor laws, etc...)?
The stock market decreases by 30% over the last 6 months.
What is:
AD (GDP) curve shifts left as investors assets are now worth significantly less.
Demand Pull Inflation
What is inflation caused by an increases in spending when there is too much money chasing too few goods in an economy (not enough AS to keep up). Makes AD curve shift right, increasing GDP.
This is how classical economic theorists think Governments should go about relieving the side effects of Recessionary or Inflationary Gaps in their economy.
What is letting the economy fix itself?
Recessionary Gap: When this occurs, the surplus of workers will cause wages and other input items to decline, which will shift AS to the right. This increases real GDP until the economy reaches equilibrium at the natural rate of unemployment (Convergence of LRAS, SRAS and AD).
Inflationary Gap: Producing beyond the equilibrium point will cause wages to increase, which will cause AS to shift left. Thus, prices increase and GDP will fall, once again until the economy reaches equilibrium at the natural rate of unemployment.
Fiscal Policy Options the governments has to fight Demand Pull Inflation
What are the options of:
Reducing gov. spending and increasing personal taxes.
(shifts AD Curve left, reducing prices and GDP)
Over the last fiscal quarter, household debt decreases by 5%.
What is:
AD Curve (GDP) shifts right as consumers have more demand / money to spend. GDP will go up, as will prices.
2 ways (minimum) Unanticipated Inflation can Cause economic Problems
Savers lose value in money built up, and buy less.
Real Wages are slow to catch up with inflation, so standards of living can decrease.
Lenders receive less valuable returns, less willing to lend moving forward.
The Difference between Recessionary Gaps and Inflationary Gaps
What is:
Recessionary Gap: when equilibrium is below full
employment output level.
and
Inflationary Gap: when equilibrium is above full
employment output level.
Based on the following economic situation in the US, please recommend two different Fiscal Policy initiatives that would help to alleviate the problems in the economy. Please make sure to tell me what the primary problem(s) is as well as the benefits and costs of the changes you recommend:
Economic Situation: Economy is growing at a rate of 0.5% per year, with an unemployment rate of 10%. The annual deficit is $500 billion and the total debt for the country is approaching $7 Trillion. Inflation is at 0.25% per year.
Solutions: Increase gov. spending (multiplier) and decrease taxes. AD curve with shift right, boosting GDP and prices.
Con: Can create demand pull inflation if done too quickly, and will increase national deficit.
American Minimum wage goes up 15%!
What is:
The AD curve shifts right, causing GDP and prices to go up.
The AS curve shifts left as input costs rise. This causes prices t increase and GDP to fall...
This means that the GDP can not be determined, but prices have gone up.