Economic Changes and Cycles

Chapter 12Economics

Inflation & DeflationSection 1

Do Now

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

reading.

Objective

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

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.

Effects of Hyperinflation in Zimbabwe

Demand-Side Inflation

•When the inflation originates on the demand side.

•Example: An increase in the money supply causes prices to rise.

Supply-Side Inflation •Example of a cause: A drought lowers the

output of food goods.

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.

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.

Deflation•Deflation: A decrease in the price level.

Demand-Side Deflation•When aggregate demand decreases &

aggregate supply stays the same. ▫Example of a cause: A decrease in the

money supply.

Supply-Side Deflation•When aggregate supply increases &

aggregate demand stays the same. ▫Example: Technology advancements

increase productivity.

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.

The Business Cycle

The Business Cycle•Business cycle: Recurrent swings in real

GDP.

Phases of the Business Cycle1. Peak

▫ The high point▫ Real GDP is at a temporary high

2. Contraction▫ Real GDP decreases▫ If real GDP decreases for two consecutive

quarters, the economy is said to be in recession.

3. Trough▫ The low point in real GDP▫ Happens just before it begins to rise

Phases of the Business Cycle

4. Recovery▫ Real GDP is rising

5. Expansion▫ Increases in real GDP beyond the

recovery

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

Economic Growth

Causes of Economic Growth

•Natural resources•Labor•Capital•Human capital •Technological Advances•Incentives

Rule of 72

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

Rule of 72 Examples

1. You have $2,000 in a CD earning 3% annual interest. How many years until the principal doubles?

2. You have $3,789 in a savings account earning 2% annual interest. How many years until the principal doubles?

3. You have $5,500 in a CD earning 7% annual interest. How many years until the principal doubles.