1. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. CHAPTER 18 Causes of Long-Term Growth and Inflation

2. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-1 Three Stages of Production

3. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-2 Generalized Relationship between Inputs and Output

4. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-3 Postponing Diminishing Returns

5. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-4 The Power of Compounding: Effects of Compounding $1 for 515 Years

6. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-5 How Governments Can Promote Economic Growth

7. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-6 How Governments Can Impede Economic Growth

8. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-7 GDP relationship 1: Nominal GDP ≡ P × Q

9. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-8 GDP Relationship 2: Nominal GDP ≡ M 2 × V 2

10. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-9 V 2 Is a Derived Value

11. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-10 Equation of Exchange

12. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-11 GDP Components in Percentage Terms: An Approximation

13. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-12 Equation of Exchange in Percentage Terms

14. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-13 EOE: Causes of Inflation

15. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-14 Causes of Long-Term Changes In M 2

16. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-15 Factors That Affect the Portfolio Demand to Hold M 2 and the M 2 Velocity

17. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-16 M 2 Velocity in the United States, 1959–2006 Source: Federal Reserve Bank of St. Louis, Economic Data—FRED II, http://research.stlouisfed.org/fred2/ (accessed October 10, 2006).

18. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-17 Changes in U.S. M 2 Velocity and Inflation Rate, 1959–2006 Source: Federal Reserve Bank of St. Louis, Economic Data—FRED II, http://research.stlouisfed.org/fred2/ (accessed October 10, 2006).

19. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-18 Discretionary Change in M 2 to Achieve 0% Long-Term Inflation

20. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-19 Monetarism: Inflation Is a Monetary Phenomenon

21. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-20 Short-Run Phillips Curve Relationship

22. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-21 U.S. Phillips Curve Relationship, 1959–1968 Source: U.S. Department of Labor, Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey, Consumer Price Index, http://www.bls.gov/data/home.htm (accessed January 30, 2006).

23. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-22 U.S. Inflation and Unemployment, 1959–2006 Source: U.S. Department of Labor, Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey, Consumer Price Index, http://www.bls.gov/data/home.htm (accessed October 14, 2006).

24. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit M18-1 Labor Market

25. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-23 The Natural-Rate Hypothesis

26. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-24 Long-Term and Short-Term Phillips Curves, 1959–2006 Source: U.S. Department of Labor, Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey, Consumer Price Index, http://www.bls.gov/data/home.htm (accessed October 10, 2006).

27. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 18-25 Changes in the Natural Rate of Unemployment

28. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A18-1 Changes in the Natural Rate of Unemployment

29. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A18-2 Monetary Rule: Target Inflation Rate=0%

30. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A18-3 Can Falling Real GDP Cause Long-Term (30%) Inflation?

31. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A18-4 Can Rising Velocity Cause Long-Term (30%) Inflation?

32. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A18-5 Can Rising Velocity and Falling Real GDP Cause Long-Term (30%) Inflation?

33. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A18-6 Can Rising Money Supply Cause Long-Term (30%) Inflation?

34. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A18-7 Inflation in Argentina and Turkey Caused by Excessive Money Growth* Source: IMF, International Financial Statistics Online, http://ifs.apdi.net/imf/about.asp (accessed June 6, 2006). *The money supply figures in Exhibit A18-7 come from the IMF’s ‘‘Money’’ and ‘‘Quasi-money’’ statistics. Money is defined as currency outside depository banks and demand deposits other than those of the central government. Quasi-money is defined as liabilities of financial institutions, comprising time, savings, and foreign currency deposits of resident sectors other than central government.