Unit 4 B Flashcards
Test review
GDP Deflator
measures changes in the price of ALL spending(C+I+G+Xn).
Producer Price Index
measures changes in input costs for businesses(labor, parts, equipment, insurance, utilities).
Consumer Price Index
Measures a “market basket” of goods that consumers typically buy and weighs the goods in the basket based on how often people buy them. CPI is the measurement of inflation we will focus on. Formula: Current Cost of Basket/Base year Cost of Basket x100
Aggregate Supply measures
how much we can produce(think PPF).
Aggregate Demand measures
what people actually bought(C+I+G+Xn).
The AS/AD curve shows
what happens to output and prices with changes in AS or AD.
When any demand curve shifts out
prices go up and output goes up.
When any demand curve shifts in
prices go down and output goes down.
When any supply curve shifts out
prices go down and output goes up.
When any supply curve shifts in
prices go up and output goes down.
The Phillips curve measures
changes in inflation and unemployment when either AD or AS shift.
When AD shifts out
prices go up and output goes up causing unemployment to go down(we make more goods). As a result you will move UP the Phillips curve to higher inflation and lower unemployment.
When AD shifts in
prices go down and output goes down causing unemployment to go up(we make fewer goods). As a result you will move down the Phillips curve to lower inflation and higher unemployment.
When a AS shifts out
prices go down and output goes up causing unemployment to go down(we make more goods). As a result the entire Phillips curve shifts in to lower inflation and lower unemployment - best case scenario.
When AS shifts in
prices go up and output goes down causing unemployment to go up(we make fewer goods). As a result the entire Phillips curve shifts out to higher inflation and higher unemployment - worst case scenario.
Long Run Supply Curve
On both the AS/AD curve and the Phillips curve there is a marker(straight up and down line)that represents full employment. That is the goal of fiscal and monetary policy. The straight up and down line will shift out if we get more efficient and supply curves shift out(just like a PPF). We can produce more goods, keep unemployment low and prevent inflation from creeping into the economy.
Problems Caused by inflation?
- Loss of Purchasing Power
- Crowding Out Effect (higher prices will push people out of markets)
- Bracket Creep - higher inflation will push wages higher and push people into higher tax brackets
- Menu costs - costs businesses experience when they have to adjust to higher input costs
What is the solution to inflation?
Productivity
Demand-Pull inflation
caused by AD shifting out.
Cost-push inflation
caused by AS shifting in
Inertial inflation
the expected rate of inflation.
