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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.)
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

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?
  • The central banking system for the United States
  • Responsible for carrying on MONETARY POLICY
  • Created in 1913 by the Federal Reserve Act
monetary policy
MONETARY POLICY
  • 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:
  • 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
  • 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

Yom Kippur War

video tutorial2
Video Tutorial
  • STAGFLATION: (30:00)
slide45

1. A rise in the price level which decreases the purchasing power of money is called

  • a. inflation
  • b. deflation
  • c. disinflation
  • d. hyperinflation
  • e. stagflation
slide46

2. A decline in the price level is called

  • a. hyperinflation
  • b. inflation
  • c. stagflation
  • d. disinflation
  • e. deflation
slide47

3. A decline in the rate of inflation is called

  • a. hyperinflation
  • b. disinflation
  • c. inflation
  • d. deflation
  • e. stagflation
slide48

4. Modern fiscal policy results from the work of

  • a. Jean Baptiste Say
  • b. Arthur Laffer
  • c. John Maynard Keynes
  • d. Arthur Okun
  • e. Thomas Malthus
slide49

5. Which policy measure would a Keynesian economist support to combat recession?

  • a. doing nothing
  • b. balanced budget
  • c. decreasing wages
  • d. deficit spending
  • e. printing money
slide50

6. What is an appropriate fiscal policy measure to combat recession?

  • a. decreasing the federal funds rate
  • b. increasing government spending
  • c. purchasing government securities
  • d. increasing the reserve ratio
  • e. There is no appropriate fiscal policy measure to combat recession.
slide51

7. What is an appropriate fiscal policy measure to combat inflation?

  • a. increasing government spending
  • b. increasing the discount rate
  • c. increasing the tax rate
  • d. increasing the federal funds rate
  • e. There is no appropriate fiscal policy measure to combat inflation.
slide52

8. What is an appropriate fiscal policy measure to combat stagflation?

  • a. increasing the discount rate
  • b. decreasing the tax rate
  • c. decreasing government spending
  • d. purchasing government securities
  • e. There is no appropriate fiscal policy measure to combat stagflation
slide53

9. An example of discretionary fiscal policy is

  • a. corporate bailouts
  • b. monetarism
  • c. Social security payments
  • d. open market operations
  • e. unemployment insurance payments
slide54

10. An example of automatic stabilizer in fiscal policy is

  • a. open market operations
  • b. corporate bailouts
  • c. monetarism
  • d. unemployment insurance payments
  • e. Social Security payments
slide56

12. How many people serve on the Federal Reserve Board of Governors?

  • a. 5
  • b. 12
  • c. 7
  • d. 10
  • e. 14
slide57

13. Each member of the Federal Reserve Board of Governors is appointed

  • a. to a 4-year term
  • b. for life
  • c. to a 14-year term
  • d. to a 10-year term
  • e. to a 6-year term
slide58

14. The primary tool of monetary policy is

  • a. open market operations
  • b. the discount rate
  • c. the reserve ratio
  • d. government expenditures
  • e. taxation
slide59

15. The interest rate the Federal Reserve charges for loans to banks is called the

  • a. consumer rate
  • b. discount rate
  • c. reserve rate
  • d. federal funds rate
  • e. prime rate
slide60

16. The interest rate on overnight loans between banks is called the

  • a. consumer rate
  • b. discount rate
  • c. federal funds rate
  • d. reserve rate
  • e. prime rate
slide61

17. The main function of the Federal Reserve is to

  • a. regulate the money supply
  • b. levy taxes
  • c. conduct fiscal policy
  • d. regulate wages
  • e. regulate international trade
slide62

18. A monetary policy measure to combat inflation is

  • a. decreasing the tax rate
  • b. increasing government expenditures
  • c. increasing the discount rate
  • d. decreasing the reserve ratio
  • e. decreasing the prime rate
slide63

19. A monetary policy measure to combat recession is

  • a. increasing government expenditures
  • b. increasing the reserve ratio
  • c. purchasing government securities
  • d. decreasing the tax rate
  • e. increasing the federal funds rate
slide64

20. The current head of the Federal Reserve is

  • a. Janet Yellen
  • b. Robert Zoellick
  • c. Paul Wolfowitz
  • d. Alan Greenspan
  • e. Ben Bernanke
slide65

21. A shortfall in the annual federal budget:

  • a. inflation
  • b. recession
  • c. deficit
  • d. debt
  • e. depression
slide66

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
slide67

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
slide68

24. The central banking system of the United States:

  • a. the Treasury Department
  • b. the Commerce Department
  • c. FDIC
  • d. SEC
  • e. Federal Reserve
slide69

25. The current Secretary of the Treasury is

  • a. Timothy Geithner
  • b. Ben Bernanke
  • c. Alan Greenspan
  • d. Henry Paulson
  • e. Larry Summers
slide70

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

  • a. demand-pull inflation
  • b. cost-push inflation
slide71

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.
slide72

28. High inflation and high unemployment:

  • a. deflation
  • b. disinflation
  • c. hyperinflation
  • d. stagflation
  • e. none of these
slide73

29. If the CPI is 138, prices

  • a. have decreased 38%.
  • b. have increased by 38%.
  • c. have stayed the same.
slide74

29. If we’re in a recession, we need a

  • a. tight money policy
  • b. loose money policy
slide75

29. A contractionary policy is a

  • a. tight money policy
  • b. loose money policy
what is a tax
WHAT IS A TAX?
  • 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)
arthur laffer reagan s econ advisor
Arthur Laffer: Reagan’s Econ. Advisor
  • 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
slide88

1. The 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
slide89

2. The two largest sources of tax revenue for state and local governments are

  • a. sales and property taxes
  • b. personal income and corporate income taxes
  • c. sales and personal income taxes
  • d. sales and corporate income taxes
  • e. property and personal incomes taxes
slide90

3. Personal income tax in the United States and in the states which have it is a

  • a. flat tax
  • b. fair tax
  • c. regressive tax
  • d. liberal tax
  • e. progressive tax
slide91

4. Sales taxes are _____ because they fall more heavily on those least able to pay.

  • a. regressive tax
  • b. progressive tax
  • c. fair tax
  • d. flat tax
  • e. liberal tax
slide92

5. Another name for proportional tax:

  • a. liberal tax
  • b. regressive tax
  • c. fair tax
  • d. flat tax
  • e. progressive tax
slide93

A tax on a specific good or service like gas:

  • a. sales tax
  • b. excise tax
  • c. income tax
  • d. property tax
  • e. capital gains tax
slide94

An excise tax which attempts to influence behavior harmful to society as well as to raise revenue:

  • a. capital gains tax
  • b. value added tax
  • c. regressive tax
  • d. sin tax
  • e. ad valorem tax
slide95

To create the biggest stimulus, a tax cut should be designed to benefit those with a

  • a. high MPC and a low MPS
  • b. low MPC and a high MPS
  • c. high MPC and a high MPS
  • d. low MPC and a low MPS
slide96

A tax benefit which can be subtracted from one’s income before figuring taxes, thus reducing the amount of taxable income counted:

  • a. a tax deduction
  • b. a tax credit
slide97

A tax benefit which is subtracted directly from your total tax bill:

  • A. a tax dedcuction
  • B. a tax credit
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