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.