Chapter 12-Business Cycles

Inflation-a Second Look

Supply v Demand Inflation A increase in AG or a decrease in AS will result in inflation.

We have inflation when AD increases more than AS

What are the nuts and bolts to inflation? The Simple Quantity Theory of Money!

What is M x V = P x Q M = Money Supply V = Velocity (the average times a dollar is spent each year P = Prices Q = Quantity of Output

How does the Theory Work? Note that each side of the equation must be the same! We must hold V and Q constant What happened when the money supply doubled? FYI-in the real world prices may not change identically to the change in the money supply

Deflation A decrease in AD or an increase in AS can cause deflation

The Simple Quantity Theory of Money and Deflation Do not forget to hold V and Q constant. What happened when the MS decreased? Prices dropped! $250 x 2 = $500 = $5 x 100 = $500

Assignment Read and describe two problems associated with inflation and two associated with deflation

What is a Business Cycle? Recurring swings (up or down) in Real GDP Recession- two consecutive quarters of falling real GDP Peak-Real GDP at a temporary high Contraction-Real GDP decreases for two consecutive quarters Trough-low point of real GDP Recovery-Real GDP rises to the point of the last peak Expansion-Real GDP grows past previous peak

Can We Predict Cycles? Flu signs Indicators – Leading – Coincident – Lagging

What Causes The Business Cycle? Changes in the Money supply Changes in Investment, Residential construction, and Government Spending Politics Innovation Supply Shocks

What is Growth? Absolute Real Economic Growth-an increase in Real GDP from one period to the next. Per Capita Real Economic Growth-an increase from one period to the next in Per Capita Real GDP, which is Real GDP/Population.

How Fast Does an Economy Double Rule of 72 72/Growth Rate If an economy is growing at 3% an economy will double every 24 years. 72/3=24 The higher the growth rate the fast the economy doubles.

What Could Push the PPF Outwards? Natural resources Labor Capital Human Capital Technological Advances Incentives