Inflation

• The American economy can best be described as unpredictable.

• 3 major challenges that will slow down economic growth• Inflation- general increase in prices• Unemployment• Poverty

What causes inflation?

• The Quantity theory suggests that inflation

occurs when there’s too much money in the

economy.• The Demand-Pull Theory suggests that inflation

occurs when the demand for goods and services exceeds the existing supplies.

• The Cost-Push Theory suggests that Inflation

occurs when producers raise prices in order to

meet increased production costs.

Effects of Inflation

• In most cases, if inflation causes prices of everything to go up, how do you think employers will react to help compensate their employees?

• See Wage-Price Spiral

Types of jobs that employers can easily raise wages to compensate for inflation:• Doctors • Lawyers• Businessmen/women

Types of jobs that make it harder to raise thewages to compensate for inflation:• Clerks• Cashiers• Waiter/waitresses • http://www.bls.gov/cps/

Unemployment

• The U.S. unemployment rate is currently 10.4%

• What do you think? When the unemployment rate increases, what phase of the business cycle is that most likely to lead the economy towards? Why?

• (contraction, because the higher the unemployment rate, the less money is likely to be spent back into the economy, which leads to economic decline)

Types of UnemploymentFrictional UnemploymentUnemployment that occurs when people take time to find a job Seasonal Unemployment that occurs as a result of a change in seasons throughout the year Structural UnemploymentUnemployment that occurs as a result when workers’ skills no longer match the jobs that are available

Cyclical UnemploymentUnemployment that rises during economic decline and falls during economic growth

Causes of Unemployment

• New technology– Ex: new machines

• Discovery of new resources– Ex: hydroelectric cars

• Changes in consumer demand– Ex: blockbuster/netflix/redbox

• Globalization (outsourcing)– Ex: Walmart

• Lack of education – Ex: Manager at McDonalds

• Full Employment – achieved only when there is no (cyclical) unemployment.

Poverty

• (Not having enough income to support a family or household)

• Poverty ThresholdThe level that distinguishes whether someone is in poverty • In 2005, the poverty Threshold was ($19,995) for a

family of four.

Causes of Poverty

• Lack of (education)• Location• Racial and Gender Discrimination• Shifts in family structure

Anti-Poverty Policies

• Enterprise Zones – locations where businesses can operate free of certain local, state, and federal taxes.

• What is the goal of this policy?(to give incentives to businesses to invest in “rundown” locations as a way of increasing the local economy in that area)

• Welfare – Government assistance in the form of money, food, and medicine. In order to receive welfare, all that was required was certain paperwork.

Reforming Welfare

– TANF – Temporary Assistance for Needy Families

1. Allows families to receive lump sums of money 2. What’s the catch?

(in order to receive the money, the person must have a job)

3. TANF is an attempt by the Government to switch from Welfare to “Workfare”

• According to the Quantity Theory:a. Inflation occurs because there is not enough money in the economy.b. Inflation occurs because demand exceeds supply for goods and services.c. [Inflation occurs because there is too much money in the economy.]

• The cost-push theory of inflation states that:a. Inflation occurs because there is not enough money in the economy.b. [Inflation occurs because the costs of producing goods and services go up and are then passed along to the consumer.]c. Inflation occurs because there is too much money in the economy.

• Which of the following best describes the demand-pull theory of inflation?a. [Inflation occurs because demand exceeds supply for goods and services.]b. Inflation occurs because the costs of producing goods and services go up and are then passed along to the consumer.c. Inflation occurs because there is too much money in the economy.

• Purchasing power describes what happens to our ability to buy goods and services when prices...a. fall due to inflation.b. [rise due to inflation.]c. rise due to deflation.

• True or False? The market basket is a combination of goods and services that the BLS uses to track changes in the general price level. These are items that an average family will spend money on in a given month.a. [True]b. False