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Aggregate=all together
Aggregate demand and aggregate supply
considers the entire quantity of goods and
services in an economy.
The equilibrium price in aggregate supply
and demand curves is called the price level.
S1
D1
Inflation / Deflation
What is it?
an increase in the price level
a decrease in price level
CPI= Consumer Price Index
How is it determined?
by comparing the CPI in different years and
noting the change
CPI is higher=inflation
CPI is lower=deflation
Can be caused by
supply-side shifts or demand-side shifts
woohoo!!
more people!!
more money!!
o
gr il
ain
% change M = % change P
remember
Monetary Policy?
Monetary Policy
Fed is responsible for maintaining price
stability and employment
Expansionary Monetary Policy
goal is to increase money supply
to reduce unemployment
to avoid deflation
So What?
Negative Effects of Inflation
hurts people on fixed incomes (the retired)
hurts savers
hurts lenders (helps debtors)
hurts people who contract to be paid in the future
makes financial decision making more difficult
hedging = avoiding or lessening a loss by taking a
counterbalancing action.
buy gold or some other store of value besides money
So What?
Negative Effects of Deflation
Great Depression!
uneven fall in prices
business failures
job loss
hurts debtors
hurts property-owners
Stagflation
Whats up with that?
and
inflation
1970s US and other industrialized nations experienced stagflation
erratic monetary policy: stop-and-go, on-and-off
supply shocks (OPEC)
Review
What are some possible causes of
inflation?
What are some possible causes of
deflation?
Why is the relationship between
unemployment and inflation usually
inverse?
Why is inflation a problem?
Review
How does the the fed use monetary
policy to control inflation?
Homework
Read Chapter 14 Business Cycles and
Economic Growth pps. 364-386
Complete Review Sections p.386-387
Economics Vocabulary (writing complete sentences)
Review Questions
Analyzing Primary Sources