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Econ SG 8
SG on chap 8
| Question | Answer |
|---|---|
| What is Inflation | An overall increase in the level of prices prevalent in an economy over time |
| Hyperinflation | Very high rate of inflation (over 100 percent per year) |
| How do deflation, inflation, and hyperinflation differ? | Deflation would be considered good for the economy. Inflation isn’t good, but it’s what is common. Hyperinflation is devastating. |
| Deflation | Prices on average are falling |
| What do deflation, inflation, and hyperinflation have in common? | All deal with money and overall look at what it’s doing to prices in a market |
| How do we measure inflation? | CPI |
| Discuss the Consumer Price Index: Who collects and interprets the data? How? How often? | gCollected by the Bureau of Labor Statistics through the market basket from a consumer survey done every ten years (prices are updated monthly) |
| What is CPI? | CPI is the measure of average change over time in prices paid by urban consumers for a market basket of consumer goods/services |
| What problems did the invention of money overcome? | Bartering |
| Discuss the issues of “dual coincidence of wants” arising from barter exchange | Each side of the exchange has to have what the other side wants |
| What is a “medium of exchange”? How does it differ from barter? | A medium of exchange allows for a larger variety of what can be traded or given. Bartering is a good that the other wants. Medium of exchange can be unequal like money or service |
| Does modern paper money have intrinsic value? If not, why do people accept it in exchange for real goods and services? | No. Modern paper money could be destroyed. The system could change (our belief that US economic/political system was strong could change), and it’d be worth nothing. We use it now because it’s the current medium of exchange. |
| What is the Money Supply? | Amount of money in circulation |
| Who controls the amount of it in circulation? | Federal Reserve |
| What is the federal reserve system? | An arm of the gov, primary task is to control money supply for nation |
| What kind of bank is the federal reserve system? | Central |
| Who controls the Fed? | Board of governors |
| How does the Fed control the Money Supply? | Through conducting open market operations, setting reserve requirements, and setting discount rate |
| Describe Open Market Operations | refers to the buying/selling of US treasury debt securities on open markets (like wall street) |
| Discuss discount loans | Interest rate that the fed charges banks to borrow money on a short-term basis |
| Reserve Requirements | Minimum restrictions on the amount of money that a bank must always have (in either cash or deposits) |
| How is the inflation rate tied to the Money Supply? | If either increases, the other will increase |
| Explain the relationship between inflation and the money supply using the equation of exchange. | Equation: MV=PQ If Q and V are constant, real level of output of the finished goods/services and velocity of money, then an increase in M (money supply) will increase P )(economy’s price level) |
| What happens in the long-run to the price level if the money supply doubles? Is cut in half? | The price level will double or cut in half respectively. |
| Set up an equation of exchange assuming that the money supply is $10,000, V=4, Q=8,000. What will the price level stabilize at? | MV=PQ 4(10,000)=8,000P 40000=8000P P=5 dollars |
| What was the result of hyperinflation in Germany in the 1920’s? | Middle class had their savings destroyed, and prices doubled very 3.7 days |
| Economic problems caused by the hyperinflation | Destroys the value of saving, leads to economic instability, leads to political instability |
| Which political party came into power in Germany because of the resulting debacle? | Nazi party |
| Under what conditions can the government increase the money supply without triggering inflation? | If the economy is in a recession |
| Describe the individual parts of the cycle: peak, trough, prosperity, recovery, recession | Peak is high economic growth, trough is low economic growth, prosperity is good economic growth, recovery is increasing economic growth, recession is declining economic growth. |
| What is the difference between the recovery phase and the prosperity phase of the business cycle? | Recovery involves increasing economic growth. The growth is not ideal, there is still struggle. Prosperity leads to a peak, the economy is stable. GDP surpasses previous peak to be prosperity. |
| What can cause the business cycle to enter into a recession? | Over optimistic behavior and supply shock |
| Discuss overconfidence among business investors | Investors take risks they normally wouldn’t take during periods of prosperity. Businesses over expand which call for some type of correction and a recession is triggered. |
| Discuss supply shock | Supply shock is a drastic and significant change in supply of a good that is essential for economic activity. |
| Housing bubble of 2007 | Overconfidence:. In 2007, investors thought the housing prices would keep rising so they kept investing. The bubble burst and there was lots of foreclosure, lower chances to get loans, failing neighborhoods, and roughing living conditions. |
| OPEC Crisis of 1974 | Supply shock: In 1974, the oil supply was low after an embargo was declared. Factories were shut down and workers laid off. Spending had to be adjusted |
| How can the Fed use it money creation powers to stimulate the economy as it slides into recession? What is this policy called? | Can incr. money supple to provide short term stimulus to macro economy and result in higher levels of output, employment, and incomes. It’s called expansionary monetary policy |
| What does a rightward shift do to money supply? | Lowers market interest rates |
| What do the new rates do to the amount of home buying and other interest rate sensitive purchases? | Incr amount of home buying and other purchases |
| Why do politicians find themselves under political pressure to increase the money supply? | There’s a direct correlation to reelection and the state of economy, they will inflate the economy to help everyone out and gain votes |
| How can the Fed use its money creation powers to slow an economy that is “overheating”? What is this policy called? | Decrease the money supply to lower overall economic activity which results in lowering levels of output, employment, and incomes. Policy is called contractionary monetary policy |
| Explain the impact of the now higher interest rates. | Higher rates cause lower consumption by consumers and lower production by produces, decr amounts of loan borrowing, and an incr incentive to save rather than spend. Inflation may be prevented for a little bit |
| The Gold Standard: What is it? | Gov backs paper money with gold |
| Explain the mechanism of enforcement that keeps a government from printing too much money under a gold standard. | Gov can’t issue the money unless they have it in the vaults |
| Using the equation of exchange explain why it is difficult to have inflation under a gold standard. Could you have inflation if a huge new gold deposit was discovered? | It’s difficult to print too much money because it has to be backed by gold. I guess if more was discovered you could, but it’s unlikely |
| Has any country ever had a hyperinflation when on a gold standard? | No |
| Can a government on a gold standard use expansionary monetary policy to stimulate the economy during a recession? | No bc the gov would have to take a passive approach and then the economy would be recovered bf hand |
| What is a price control. | Legal restriction on price that transaction takes place at which trade can occur |
| Price ceiling? | Max price for good |
| Price floor? | Min price for good |
| What will happen to Quantity demanded at the price ceiling? What will happen to Quantity Supplied at that same price? Do we have a surplus or shortage of cell phones? | The quantity demanded became greater than the quantity supplied which leads to a shortage of cell phones |
| Do price controls help consumers on net? | No because the controls are supposed to help with inflation which is caused by money supply. Customers have to buy the product at a non equilibrium price which creates deadweight loss through surpluses and shortages |
| Why does chronic inflation tempt politicians into imposing wage and price controls? | politicians want to be reelected so they implement price/wage controls to make people happy and help them get more votes |
| Which U.S. President imposed price controls? When? | Richard Nixon; 1971 |
| Are price controls successful at tamping down inflation when the government is continuing to increase the money supply? | No bc the price level isn’t the real problem and it will only help inflation temporarily |
| What will solve the inflation problem? | By decr money supply over time and incr reserve requirements, the inflation problem would be solved |
Created by:
MikalahQuillen
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