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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

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:  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?

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


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:

    • 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!


    Due to SUPPLY SHOCKS!


    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


    Compiled by Bureau of Labor Statistics


    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

    • 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 Policyand Demand Side Economics


    The Employment Act of 1946


    Video Tutorial

    • EPISODE 26: Fiscal Policy (4:34)

    • EPISODE #26: FISCAL POLICY

    • PAUL SOLMAN VIDEO


    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:

      • 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

    HIGH MPC

    LOW MPS


    Secretary of the TreasuryJacob “Jack” Lew


    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

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

    • EPISODE #27: CROWDING OUT - LAGS


    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


    MONETARY POLICY: The process by which the Fed controls the money supply


    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


    12 District Banks – 25 Branches


    Chairman of the FedWAS: Ben Bernanke IS: Janet Yellen


    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:

    • 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

    • 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

    Yom Kippur War


    STAGFLATION


    POLITICAL POISON!


    Video Tutorial

    • STAGFLATION: (30:00)


    CARDS UP on INFLATION


    • 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


    • 2. A decline in the price level is called

    • a. hyperinflation

    • b. inflation

    • c. stagflation

    • d. disinflation

    • e. deflation


    • 3. A decline in the rate of inflation is called

    • a. hyperinflation

    • b. disinflation

    • c. inflation

    • d. deflation

    • e. stagflation


    • 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


    • 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


    • 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.


    • 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.


    • 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


    • 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


    • 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


    • 11. How many district banks make up the Federal Reserve?

    • a. 5

    • b. 7

    • c. 10

    • d. 12

    • e. 14


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

    • a. 5

    • b. 12

    • c. 7

    • d. 10

    • e. 14


    • 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


    • 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


    • 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


    • 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


    • 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


    • 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


    • 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


    • 20. The current head of the Federal Reserve is

    • a. Janet Yellen

    • b. Robert Zoellick

    • c. Paul Wolfowitz

    • d. Alan Greenspan

    • e. Ben Bernanke


    • 21. A shortfall in the annual federal budget:

    • a. inflation

    • b. recession

    • c. deficit

    • d. debt

    • e. depression


    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:

    • a. the Treasury Department

    • b. the Commerce Department

    • c. FDIC

    • d. SEC

    • e. Federal Reserve


    • 25. The current Secretary of the Treasury is

    • 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:

    • a. deflation

    • b. disinflation

    • c. hyperinflation

    • d. stagflation

    • e. none of these


    • 29. If the CPI is 138, prices

    • a. have decreased 38%.

    • b. have increased by 38%.

    • c. have stayed the same.


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

    • a. tight money policy

    • b. loose money policy


    • 29. A contractionary policy is a

    • a. tight money policy

    • b. loose money policy


    END OF QUIZ


    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)


    TAX SYSTEMS:


    TAX REVENUE:


    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


    Laffer and Wanisky


    Laffer Curve


    Laffer Curve


    Assume 15%

    15%


    THEORY

    PRACTICE

    The Laffer Curve in…


    • 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


    • 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


    • 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


    • 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


    • 5. Another name for proportional tax:

    • a. liberal tax

    • b. regressive tax

    • c. fair tax

    • d. flat tax

    • e. progressive tax


    • 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


    • 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


    • 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


    • 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


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

    • A. a tax dedcuction

    • B. a tax credit


    END OF QUIZ


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