Economic Changes and Cycles

1. Economic Changes and Cycles Chapter 12 Economics

2. Inflation & Deflation Section 1

3. Do Now • Each student will need a textbook today. • Take out paper and the business cycle reading.

4. Objective • Learn about inflation, deflation, hyperinflation, and the consequences (negative & positive) of both.

5. Inflation - Review • Inflation is an increase in the price level. • Measured by the change in the CPI. • A positive change = inflation. • A negative change = deflation.

6. Effects of Hyperinflation in Zimbabwe

7. Demand-Side Inflation • When the inflation originates on the demand side. • Example: An increase in the money supply causes prices to rise.

8. Supply-Side Inflation • Example of a cause: A drought lowers the output of food goods.

9. Effects of Inflation • People on fixed incomes are especially hurt by inflation. • Savers need to look for investments that beat inflation. Banks respond by increasing interest rates on savings accounts. • Turns past decisions into mistakes.

10. Effects of Inflation • People try to hedge against inflation so resources get diverted away from being used to produce goods & services. • Hedge: To try to avoid or lessen a loss by taking some counterbalancing action.

11. Deflation • Deflation: A decrease in the price level.

12. Demand-Side Deflation • When aggregate demand decreases & aggregate supply stays the same. • Example of a cause: A decrease in the money supply.

13. Supply-Side Deflation • When aggregate supply increases & aggregate demand stays the same. • Example: Technology advancements increase productivity.

14. An Effect of Deflation • Costs don’t always fall right away. • This means products are more expensive for firms to produce. • Therefore, firms go out of business.

15. The Business Cycle

16. The Business Cycle • Business cycle: Recurrent swings in real GDP.

18. Phases of the Business Cycle • Peak • The high point • Real GDP is at a temporary high • Contraction • Real GDP decreases • If real GDP decreases for two consecutive quarters, the economy is said to be in recession. • Trough • The low point in real GDP • Happens just before it begins to rise

19. Phases of the Business Cycle 4. Recovery • Real GDP is rising 5. Expansion • Increases in real GDP beyond the recovery

20. Economic indicators • Leading indicators – occur before the stage • Example: stock market • Coincident indicators – happen during the stage • Example: GDP • Lagging indicators – happen at the end of the stage • Example: unemployment rates

21. Economic Growth

22. Causes of Economic Growth • Natural resources • Labor • Capital • Human capital • Technological Advances • Incentives

23. Rule of 72 • Number of years for a variable to double • Rule of 72 = 72/growth rate

24. Rule of 72 Examples • You have $2,000 in a CD earning 3% annual interest. How many years until the principal doubles? • You have $3,789 in a savings account earning 2% annual interest. How many years until the principal doubles? • You have $5,500 in a CD earning 7% annual interest. How many years until the principal doubles.