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Inflation
Inflation G8
| Term | Definition |
|---|---|
| Inflation | An increase in the average price level of all products in an economy. |
| Aggregate Supply | The total amount of goods and services produced throughout the entire economy. |
| Aggregate Demand | The total amount of spending by individuals and businesses throughout the entire economy. |
| When does inflation occur? | When aggregate demand INCREASES faster than aggregate supply. |
| What does Inflation do? | Reduces the real purchasing power of the currency. |
| Deflation . | An decrease in the average price level of all goods and services in an economy |
| When does deflation occur? | When aggregate demand DECREASES faster than aggregate supply. |
| What was the Great Depression? | Prolonged period of deflation |
| How do you measure Inflation? | Consumer Price Index (CPI) Producer Price Indes (PPI) |
| Consumer Price Index (CPI) | A measure of the average change over time in the price of a fixed group of products. |
| Producer Price Index (PPI) | A measure of the average change over time in the prices of goods and services bought by producers. |
| Effects of Inflation - causes change in | 1. The purchasing power of the rand 2. The value of real wages 3. Interest wages 4. Saving and Investing 5. Production Costs |
| Hyperinflation | A period of extremely high inflation. Example - Germany - post World War I |
| Germany in 1923 | Experienced 100% inflation/week |
| 2 Causes of the Panic of 1907. | 1. The nation's monetary system had no mechanism for expanding the amount of money in circulation. 2. The system of Pyramid reserves failed. The reserves of large banks could not cover the sudden demand for cash. |
| Results of the Panic of 1907(1) | Bank Reserves: Banks are now required to hold excess reserves in order to meet consumer demands. |
| Results of the Panic of 1907 (2) | The Federal Reserve Act of 1913: Congress creates a network of 12 independent Regional Banks. This network of Banks could lend money to other smaller banks. |
| Results of the Panic of 1907 (3) | Board of Governors: Supervise the Federal network from Washington D.C. The Board of Governors has 7 members that serve staggered 14 year terms. |
| Results of the Panic of 1907 (4) | Chairman of the Board of Governors: The President chooses one of the members of the Board of Governors to serve as chairman. The Senate must confirm the choice. |
| Who is in charge of the U.S. Monetary Policy? | The Federal Reserve |
| How do the Feds control the availability of money in the U.S? | By determining the interest rates of loans to member banks. |
| What kind of effect does the Monetary Policy stategy of the Fed have? | Direct impact on the business cycle and inflation rate. |
| 2 Research Arms of the Fed? | 1. Federal Advisory Council 2. Federal Open Market |
| Federal Advisory Council | Collect data about economic conditions within the different Fed districts. This data helps the Fed to determine the economic course of action for the nation and the different Fed districts. |
| Federal Open Market | Make Key decisions about interest rates. Committee meets 8 times/year to discuss availability of credit. |
| How do the Fed's provide Service to the Banks? (1) | 1. The Feds keeps track of billions of monetary transfers through the service of check clearing - A method od crediting and debiting banks reserve accounts. |
| How do the Fed's provide Service to the Banks? (2) | 2. Banks often need short-term loans to replinsh cash supplies. Fed usually loans 1 to 7 days. Loans sought for seasonal factors, natural disasters, and financial emergencies. |
| How do the Fed's provide Service to Government? | Fed and the Department of Treasury work together on managing the Federal Budget 1. Fed serves as the Govt's bank 2. Supervises the Fed member banks 3. Regulating the national money supply |
| 1Monetary Policy Strategy | Monetary Policy : The plan to expand or contract the $ supply in order to influence the cost and availability of credit. |
| 2 Monetary Policy Stategy | 1. Easy Money Policy - Recession 2. Tight Money Policy - Inflation |
| What does Easy Money Policy do? | Designed to expand the $$ supply, increase aggregate demand, create jobs, reduce unemployment and promote economic growth |
| When is Easy Money Policy used? | During a recession when the economy needs a boost. |
| What does Tight Money Policy do? | Slows business activity and helps stabilize prices. Higher interest rates and a contraction of the money supply, is designed to reduce aggregate demand. |
| When is Tight Money Policy used? | When the economy is grwoing and the priority of the Fed is to fight inflation. |
| Monetary Policy Limitations. | 1. Economic Forecasting 2. Time Lags 3. Priorities and Trade-offs 4. Lack of Coordination 5. Conflicting Opinions |
| 1. Economic Forecasting | Look at many factors when creating monetary policy |
| 2. Time Lags | Time passes before policies go into effect. Market conditions can change before a policy can be implemented. |
| 3. Priorities and Trade-offs | Monetary policy can fight only inflation or recession |
| 4. Lack of Coordination | The Fed controls monetary Policy. Congress controls Fiscal Policy. If the two policies are not fighting the same cause, it sends mixed signals to the market |
| 5. Conflicting Opinions | If members of the Fed disagree on policy, it sends mixed messages to the economy and makes it harder for economic policy makers. |
| Fiscal Policy | The use of government spending and taxation to influence the economy. |
| Fiscal Policy and Federal Budget | The Congress and Presidential prepare their own proposals and try to reach compromise between the two versions: - Budget Deficits: - Budget Surplus: |
| Budget Deficit | When Government's spend more than they collect in taxes. |
| Budget Surplus | Government Revenue exceed their expenditures. |
| Reasons for Deficit Spending | 1. National emergencies such as wars create a need. 2. Provide public goods/services may cause deficit spending 3. Done to stabilize the economy during recession or economic downturns |
| Tools of Fiscal Policy | 1. Marginal Tax Rate 2. Tax Incentives 3. Government Spending 4. Public Transfer Payments 5. Progressive Income Taxes |
| 1. Marginal Tax Rate | Used to : Regulate aggregate demand Lower taxes in recession, Raise Taxes to control inflation |
| 2. Tax Incentives | Tax breaks that extend to businesses to encourage investment in new capital |
| 3. Government Spending | Govt. Spending decreases to control inflation. Govt. Spending increases to reduce unemployment. |
| 4. Public Transfer Payments | Unemployment compensation is an example of Public Transfer Payments. When people loose their jobs, the government increases the amount of unemployment benefits. |
| 5. Progressive Income Taxes | Taxes based on income level. The amount taxed depends partly on strength of the economy. |
| Fiscal Policy Models | 1. Demand-Side Model 2. Supply-Side Model |
| 1. Demand-Side Model | 1. Stimulates Aggregate Demand 2. Targets lower middle-class for tax breaks 3. Hire more workers 4. Creates new prod./serv |
| 2. Supply-Side Model | 1. Stimulates Aggregate Supply 2. Targets wealthy for tax breaks 3. Reinvest in companies 4. Entreprenership 5. Create Jobs |
| Effect of Demand-Side Model | Increased consumer spending encourages businesses to raise production levels and hire more workers to meet higher production goals. |
| Effect of Supply-Side Model | Prices drop due to increased quantity supplied. Businessed hire more workers to maintain higher production levels |
| Dislikes of Taxes | 1. Government can coerce people into paying taxes. 2. Government spending of tax dollars diminishes the link between payment and individual consumption. |
| Can Govt coerce people into paying taxes? | Most economic transaction are voluntary, but yes, Govt. can coerce people into paying taxes. |
| How does Govt spending of tax dollars diminish the link between payment and individual consumption? | When people pay taxes, the benefits are often delayed, indirect, or spread so thin that they see little benefit for themselves. |
Created by:
rudolph.beukes
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