Principles of economics business cycles and inflation

1,500 views

Published on

  • Be the first to comment

Principles of economics business cycles and inflation

  1. 1. Macro233 - JFGAC Business Cycles andBusiness Cycles and InflationInflation
  2. 2. Macro233 - JAFGAC Business CyclesBusiness Cycles The business cycle is the upward and downward movement of economic activity that occurs around the growth trend.
  3. 3. Macro233 - JAFGAC Business CyclesBusiness Cycles There are a number of policies regarding business cycles. Classical economists generally favor laissez-faire or noninterventionist policies. Keynesians generally favor activist policies.
  4. 4. U. S. Business CyclesU. S. Business Cycles 20 10 0 –10 –20 ‘90‘801860 ‘70 1900 ‘10 ‘20 ‘30 ‘40 ‘50 ‘60 ‘70 ‘80 ‘90 ‘102000 McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Civil War Recovery of 1895 World War I Panic of 1893 Panic of 1907 Great Depression Korean War Vietnam War World War II
  5. 5. Macro233 - JAFGAC The Phases of the BusinessThe Phases of the Business CycleCycle The peak is the top of the business cycle. A boom is a very high peak, representing a big jump in output. The downturn is the phenomenon of economic activity starting to fall from a peak.
  6. 6. Macro233 - JAFGAC The Phases of the BusinessThe Phases of the Business CycleCycle A recession is a decline in output that persists for more than two consecutive quarters in a year. A depression is a large recession. A trough is the bottom of the recession or depression.
  7. 7. Macro233 - JAFGAC The Phases of the BusinessThe Phases of the Business CycleCycle An expansion is an upturn that lasts at least two consecutive quarters of a year.
  8. 8. Expansion ExpansionRecession The Phases of the BusinessThe Phases of the Business CycleCycle Boom Secular growth trend Downturn Upturn Trough Peak 0 Jan.- Mar TotalOutput Apr.- June July- Sept. Oct.- Dec. Jan.- Mar Apr.- June July- Sept. Oct.- Dec. Jan.- Mar Apr.- June McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
  9. 9. Macro233 - JAFGAC Why Do Business Cycles OccurWhy Do Business Cycles Occur Recessions and expansions are caused primarily by demand-side of the economy. A debate exists about whether these fluctuations can and should be reduced.
  10. 10. Macro233 - JAFGAC Why Do Business Cycles OccurWhy Do Business Cycles Occur Most economists believe that potential depressions should be offset by economic policy.
  11. 11. Macro233 - JAFGAC Why Do Business Cycles OccurWhy Do Business Cycles Occur Since the late 1940s, compared to prior years: Downturns and panics have generally been less severe. The duration of business cycles has increased. The average length of expansions has increased while the average length of contractions has decreased.
  12. 12. Macro233 - JAFGAC Why Do Business Cycles OccurWhy Do Business Cycles Occur Most economists believe that business fluctuations have become less severe because of the stronger role of government in the economy.
  13. 13. Macro233 - JAFGAC InflationInflation Inflation is a continual rise in the price level. From 1800 until World War II, the U.S. inflation rate and price level fluctuated. Since World War II, the rate fluctuated, but the movement of the price level has been consistently upward.
  14. 14. Inflation Since 1900Inflation Since 1900 McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 3020101900 40 50 60 70 80 90 2000 –10 –5 0 5 10 15 20 25
  15. 15. Macro233 - JAFGAC Measurement of InflationMeasurement of Inflation Inflation is measured with changes in price indexes. Price index – a number that summarizes what happens to a weighted composite of prices of a selection of goods over time.
  16. 16. Macro233 - JAFGAC The GDP DeflatorThe GDP Deflator The GDP deflator (gross domestic product deflator) is an index of the price level of aggregate output or the average price of the components in GDP relative to a base year.
  17. 17. Macro233 - JAFGAC The GDP DeflatorThe GDP Deflator The GDP deflator is the measure of inflation most economists favor since it includes the widest number of goods.
  18. 18. Macro233 - JAFGAC Expected and UnexpectedExpected and Unexpected InflationInflation Expected and unexpected inflation affects behavior differently. Expected inflation is inflation people expect to occur. Unexpected inflation is inflation that surprises people.
  19. 19. Macro233 - JAFGAC Expected and UnexpectedExpected and Unexpected InflationInflation Expectations of inflation play an important role in the inflation process. Inflationary expectations can accelerate large inflation.
  20. 20. Macro233 - JAFGAC Costs of InflationCosts of Inflation Inflation may not make a nation poorer. It can redistribute income from those who do not raise their prices to those who do. It can reduce the amount of information that prices are supposed to convey.
  21. 21. Macro233 - JAFGAC Costs of InflationCosts of Inflation Inflation is usually accepted by governments as long as it stays at a low level. What worries policymakers is hyperinflation.
  22. 22. Macro233 - JAFGAC Costs of InflationCosts of Inflation Hyperinflation – exceptionally high levels of inflation of, say, 100 percent or more a year. The U.S. has not experienced hyperinflation since the Civil War (1861-65).

×