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Ch.12 14

Ch.12 14






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    Ch.12 14 Ch.12 14 Presentation Transcript

    • Inflation and Deflation Chapter 12
    • What is Inflation?
      • An increase in the average level of prices. When economists measure the CPI, if it is higher than the previous year, then inflation occurred
    • Demand Side Inflation
      • An increase in price level that occurs because of a change in demand
      • Example: The Fed increases the money supply. As a result of more money circulating in the economy, people end up buying more goods and services. With the increase in demand, prices will increase.
    • Supply Side Inflation
      • An increase in the price level that occurs because of a change in supply.
      • Example: A major drought lowers the output of agricultural goods. Because of the limited quantity of goods available, the price level increases.
    • The Effects of Inflation
      • Inflation effects both producers and consumers
      • People on a fixed income: As inflation increases, individuals on a fixed income (pension, social security) have less purchasing power.
      • Inflation and past decisions: Suppose a contractor signs a contract to build a shopping mall for $30 million. He estimated costs to be approximately $28 million, and thus would earn a $2 million profit. Then with inflation, the price of labor and building materials increase and the mall will actually cost $31 million.
      • Consumers tend to spend less money, meaning producers will have to cut costs (usually labor)
    • Deflation
      • A decrease in the price level, or average level of prices
    • Business Cycle
      • The up and down phases of the economy
      • Phases of the Business Cycle :
        • Peak – highest level the economy is performing at before a recession (GDP)
        • Contraction – a decrease or downward trend in GDP. If GDP decreases for two consecutive quarters, economists consider this a recession.
        • Trough – the low point in economic productivity or GDP
        • Recovery – period in which GDP is rising
        • Expansion – refers to the growth in GDP beyond its previous peak
    • Business Cycle
    • Factors Used to Predict the Business cycle
      • 1. Stock Market
      • Unemployment
      • Money Supply
      • Consumer Price Index
      • Inflation
    • Factors that Influence Economic Growth
      • Natural Resources
      • Labor
      • Capital ($$$$$)
      • Human Capital
      • Technology
      • Incentive
    • Chapter 13 – Fiscal and Monetary Policy
      • Government fiscal and monetary policy is usually designed to target two specific areas of the economy: unemployment and inflation
    • Fiscal Policy
      • Changes the government makes in spending or taxation to achieve its economic goals
        • Expansionary – Increase spending and/or decrease taxes (goal is to decrease unemployment)
        • Contractionary – Decrease government and/or increase taxes (goal is to decrease inflation)
    • Monetary Policy
      • Changes the Fed makes in the money supply
        • Expansionary – An increase in the money supply (Reduce Unemployment)
        • Contractionary – A decrease in the money supply (Reduce Inflation)
    • Stagflation
      • The combination of high unemployment and inflation at the same time
    • Chapter 14 – Taxes and Spending
      • Three Major Federal Taxes :
      • Personal Income Tax – a tax a person pays on their income (We also pay state income tax in NY)
        • Seven states have no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming
      • Corporate Income Tax – a tax corporations pay on their profits
      • Social Security Tax – a tax generated from a individuals or businesses income
    • Other Taxes
      • Sales Tax – taxes applied to the purchasing of goods
      • Excise Tax – taxes placed on
      • certain goods like gasoline
      • and tobacco
          • Taxes on gasoline in NYS are about .48 a gallon
      • Property – taxes on property, such as your home
    • Types of Income Tax
      • Income taxes can be proportional, progressive, or regressive:
      • Proportional – a tax that everyone pays at the same rate, regardless of their income (often called a flat tax)
      • Progressive – a tax that increases as one’s income rises. Progressive tax structures are usually capped at some rate. (USA)
      • Regressive – a tax that decreases as income rises
    • How does the government spend our money?
      • National Defense – 20%
      • Income Security – 14%
      • Social Security – 20%
      • Medicare – 12%
      • Interest – 7%
      • Other – 27%
    • National Debt
      • The total amount of money that the United States owes its creditors
      • Current National Debt
      • Budget Surplus – The situation in which federal government expenditures are less than federal government revenues
      • Budget Deficit – The situation in which federal government expenditures are greater than government tax revenues