do now: inflation

GROUP WORK , but everybody records answers on individual sheets!

INFLATION ON COCO ISLETerms:

INFLATION: A rise in price level (TOOOOOO MUCH MONEY chasing

TOOOOOO FEW GOODS!)DEFLATION: A drop below the initial

price levelDISINFLATION: A lowering in price level which does not drop below the

original price

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 STUFFPay back BAD money

HurtsCREDITORS

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 SUPPLYFISCAL 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 TutorialEPISODE 26: Fiscal Policy (4:34)

FISCAL POLICYTAX : 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 POLICYAUTOMATIC STABILIZERS:

Changes in spending which DO NOT require deliberate action from policy makers

Kick in when needed during an economic downturnExample: UNEMPLOYMENT BENEFITS in a

recessionDISCRETIONARY

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 TreasuryTimothy Geithner

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 yearDEBT:

Total amount of money owed by the federal government, accumulated over the years

THE CROWDING OUT EFFECTEPISODE 27: Crowding Out - Lags (5:51)

Video TutorialEPISODE 31: The Fed (2:30)EPISODE 32: Monetary Policy (7:18)

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 FedBen Bernanke

MONETARY POLICYRESERVE 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 TutorialSTAGFLATION:

(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. Rodrigo de Rato 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. deflationb. disinflationc. hyperinflationd. stagflatione. 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 policyb. loose money policy

29. A contractionary policy is aa. tight money policyb. 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 toEncourage behavior (TAX

CREDIT/DECUDTION)Discourage behavior (SIN TAX)

TAX SYSTEMS:

TAX REVENUE:

Arthur Laffer: Reagan’s Econ. Advisor High taxes harm the

economy byStifle 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%

The Laffer Curve in…THEORY PRACTICE

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. The United States personal income tax is an example of a

a. flat tax b. fair tax c. regressive tax d. liberal tax e. progressive tax

4. A sales tax is an example of a a. regressive taxb. progressive tax c. fair tax d. flat tax e. liberal tax

5. A proportional tax is also known as a

a. liberal tax b. regressive tax c. fair taxd. flat tax e. progressive tax

END OF QUIZ