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DO NOW: INFLATION. GROUP WORK , but everybody records answers on individual sheets! INFLATION ON COCO ISLE Terms: INFLATION: A rise in price level (TOOOOOO MUCH MONEY chasing TOOOOOO FEW GOODS!) DEFLATION: A drop below the initial price level

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Do now inflation

DO NOW: INFLATION

GROUP WORK , but everybody records answers on individual sheets!

INFLATION ON COCO ISLE

Terms:

INFLATION: A rise in price level (TOOOOOO MUCH MONEY chasing TOOOOOO FEW GOODS!)

DEFLATION: A drop below the initial price level

DISINFLATION: A lowering in price level which does not drop below the original price


Focus inflation obj
FOCUS:  INFLATIONOBJ:

  • 1.  Define.

  • 2.  ID and explain appropriate contractionary policy:

  •      A. fiscal policy

  •      B. monetary policy

  • 3.  Define & differentiate

  •    A. demand-pull inflation

  •     B. cost-push inflation

  • 4. Define and differentiate:

  •     A. disinflation

  •     B. hyperinflation

  •     C. deflation

  •     D. STAGFLATION 


What is inflation
What is INFLATION?

  • A rise in price level that DECREASES the purchasing power of money


Who does it help or hurt
Who does it help or hurt?

  • Helps

    • DEBTORS

      • Borrow GOOD money and buy GOOD STUFF

      • Pay back BAD money

  • Hurts

    • CREDITORS

      • Loan out GOOD money and get paid back in BAD

      • INFLATION eats up INTEREST and EARNINGS

    • PEOPLE on FIXED INCOMES

      • Retirees on Social Security


  • 2 kinds of inflation
    2 KINDS OF INFLATION:

    • COST-PUSH INFLATION: prices rise because there is an increase in the cost of inputs (factors of production); supply shrinks in relation to demand, pushing EQUILIBRIUM PRICE UP!

    • DEMAND-PULL INFLATION: prices rise because there is an increase in demand (“gimmie-gimmie”); demand increases in relation to supply PUSHING EQUILIBRIUM PRICE UP!



    Measuring inflation
    MEASURING INFLATION:

    • CPI - CONSUMER PRICE INDEX:

      • a tool the government uses to measure INFLATION (the CHANGE IN PRICE of a market basket of goods and services used by average households OVER TIME!)

      • compiled monthly by the BLS – Bureau of Labor Statistics; they pick a BASE YEAR as 100 and compare current prices to base year prices; > 100 = INFLATION; <100=DEFLATION; most COMMON measure (See p. 339-40)

    • PPI- PRODUCER PRICE INDEX: tool that measures inflation on the SUPPLY SIDE

    • GDP DEFLATOR: a tool the government uses to measure INFLATION; more accurate, but less common



    Problems solutions
    PROBLEMS & SOLUTIONS:

    • PROBLEM=INFLATION; solution = SUCK money out of the economy to slow things down (TIGHT MONEY POLICY – CONTRACTION!)

    • PROBLEM=UNEMPLOYMENT; solution = BLOW money into the economy to stimulate growth (LOOSE MONEY POLICY – EXPANSION!)


    Controlling the money supply
    CONTROLLING THE MONEY SUPPLY

    • FISCAL POLICY: What the government can do (congress and the president) – DUSTBUSTER!

    • MONETARY POLICY: What the Federal Reserve can do – BIG VAC! (Ben Bernanke – CHAIRMAN OF THE FED – and his gang – THE FEDERAL RESERVE BD.)


    Keynesian economics fiscal policy and demand side economics
    Keynesian Economics: Fiscal Policyand Demand Side Economics



    Video tutorial
    Video Tutorial

    • EPISODE 26: Fiscal Policy (4:34)

    • EPISODE #26: FISCAL POLICY

    • PAUL SOLMAN VIDEO


    Fiscal policy
    FISCAL POLICY

    • TAX : raise or lower taxes

      --EXPANSIONARY POLICY (BLOW! to stimulate growth)

      cut taxes! LOOSE MONEY!

      --CONTRACTIONARY POLICY (SUCK! to fight inflation)

      raise taxes! TIGHT MONEY!

    • SPEND: increase or decrease spending

      --EXPANSIONARY POLICY (BLOW! to stimulate growth)

      increase spending!

      --CONTRACTIONARY POLICY (SUCK! to fight inflation)

      decrease spending


    Automatic stabilizers discretionary policy
    AUTOMATIC STABILIZERS & DISCRETIONARY POLICY

    • AUTOMATIC STABILIZERS:

      • Changes in spending which DO NOT require deliberate action from policy makers

      • Kick in when needed during an economic downturn

      • Example: UNEMPLOYMENT BENEFITS in a recession

    • DISCRETIONARY

      • Changes in spending that require the government to act

        • Corporate BAILOUT

        • New legislation on infrastructure projects like high speed rail, to create jobs


    Fiscal stimulus
    FISCAL STIMULUS

    HIGH MPC

    LOW MPS


    Secretary of the treasury jacob jack lew
    Secretary of the TreasuryJacob “Jack” Lew


    Federal budget see solman video
    Federal Budget: (See Solman video)

    • DEFICIT:

      • Total amount by which EXPENDITURES exceed REVENUES in a single year

    • SURPLUS:

      • Total amount by which REVENUES exceed EXPENDITURES in a single year

    • DEBT:

      • Total amount of money owed by the federal government, accumulated over the years


    The crowding out effect
    THE CROWDING OUT EFFECT

    • EPISODE 27: Crowding Out - Lags (5:51)

    • EPISODE #27: CROWDING OUT - LAGS


    Video tutorial1
    Video Tutorial

    • EPISODE 31: The Fed (2:30)

    • EPISODE #31: THE FED

    • EPISODE 32: Monetary Policy (7:18)

    • EPISODE #32: MONETARY POLICY

    • PAUL SOLMAN VIDEO



    What is the federal reserve
    What is the Federal Reserve? money supply

    • The central banking system for the United States

    • Responsible for carrying on MONETARY POLICY

    • Created in 1913 by the Federal Reserve Act



    Chairman of the fed was ben bernanke is janet yellen
    Chairman of the Fed money supplyWAS: Ben Bernanke IS: Janet Yellen


    Monetary policy
    MONETARY POLICY money supply

    • RESERVE REQUIREMENT (raise or lower – just NOT done!)

    • OPEN MARKET OPERATIONS (buy or sell federal government bonds)

    • INTEREST RATE (raise or lower the DISCOUNT RATE or FEDERAL FUNDS RATE)

      --DISCOUNT RATE: interest rate at which member banks borrow from the federal reserve

      --FEDERAL FUNDS RATE: interest rate at which

      banks borrow from each other


    Two types of policies
    TWO TYPES OF POLICIES: money supply

    • EXPANSIONARY POLICY (loose money policy) geared to stimulate growth and create jobs

      …………………...BLOW MONEY INTO THE ECONOMY!

    • CONTRACTIONARY POLICY (tight money policy) geared to slow growth and tame inflation) ……………………SUCK MONEY OUT OF THE ECONOMY!


    The u s economy stagnated in the 1970s
    The U.S. Economy Stagnated in the 1970s money supply

    • President Lyndon B. Johnson’s spending on the Vietnam War and on his Great Society program also depleted the U.S. treasury

    • Also, since the U.S. did not continue advancing, they were caught by the Japanese and the Germans in industries that the U.S. once dominated: steel, automobiles, consumer electronics.


    1973 oil shock
    1973 OIL SHOCK money supply

    Yom Kippur War


    Stagflation
    STAGFLATION money supply


    Political poison
    POLITICAL POISON! money supply


    Video tutorial2
    Video Tutorial money supply

    • STAGFLATION: (30:00)
























    22. The total amount of money owed by the federal government, accumulated over the years:

    • a. debt

    • b. deficit

    • c. surplus

    • d. recession

    • e. trough


    • 23. Government borrowing for expansionary fiscal policy increases demand for money and interest rates, so part of the increase in government spending is counteracted by a decrease in private investment.

    • a. the wealth effect

    • b. the price effect

    • c. the income effect

    • d. the crowding out effect

    • e. the recession effect


    • 24. The central banking system of the United States: increases demand for money and interest rates, so part of the increase in government spending is counteracted by a decrease in private investment.

    • a. the Treasury Department

    • b. the Commerce Department

    • c. FDIC

    • d. SEC

    • e. Federal Reserve


    • 25. The current Secretary of the Treasury is increases demand for money and interest rates, so part of the increase in government spending is counteracted by a decrease in private investment.

    • a. Timothy Geithner

    • b. Ben Bernanke

    • c. Alan Greenspan

    • d. Henry Paulson

    • e. Larry Summers


    26. A supply shock (an increase in the cost of an input) causes:

    • a. demand-pull inflation

    • b. cost-push inflation


    27. If you want to stimulate the economy, a tax cut should target people with

    • a. a high marginal propensity to save and a low marginal propensity to consume.

    • b. a high marginal propensity to consume and a low marginal propensity to save.


    28. High inflation and high unemployment: target people with

    • a. deflation

    • b. disinflation

    • c. hyperinflation

    • d. stagflation

    • e. none of these





    End of quiz
    END OF QUIZ target people with


    What is a tax
    WHAT IS A TAX? target people with

    • A compulsory charge or levy enacted by the government to raise revenue to fund government spending

    • May also be used to

      • Encourage behavior (TAX CREDIT/DECUDTION)

      • Discourage behavior (SIN TAX)


    Tax systems
    TAX SYSTEMS: target people with


    Tax revenue
    TAX REVENUE: target people with


    Arthur laffer reagan s econ advisor
    Arthur Laffer: Reagan’s Econ. Advisor target people with

    • High taxes harm the economy by

      • Stifle INVESTMENT (drawing CAPITAL away), thus…

      • Stifle GROWTH, so…

    • TAX CUTS for the RICH

      • Stimulate investment, thus

      • Spur GROWTH!

      • Growth reduces DEFICIT

        • increases TAX REVENUES

        • Allowing gov’t to CUT SPENDING


    Laffer and wanisky
    Laffer and Wanisky target people with


    Laffer curve
    Laffer Curve target people with


    Laffer curve1
    Laffer Curve target people with


    Assume 15
    Assume 15% target people with

    15%


    The laffer curve in

    THEORY target people with

    PRACTICE

    The Laffer Curve in…


    • 1. target people withThe largest source of federal revenue is the

    • a. property tax

    • b. personal income tax

    • c. social security tax

    • d. sales tax

    • e. corporate income tax











    End of quiz1
    END OF QUIZ tax bill:


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