...topic 7 [ Inflation] 1. Inflation - Inflation is a continuing rise in the price level, which causes money to lose value. - Inflation is a rise in the price level, not in the price of a particular commodity. - It is ongoing, not a-onetime-only increase in the price level. - The inflation rate is the percentage change in the price level. It is calculated as the following: Current price level – Last year's price level x 100 Last year's price level 2. Demand-Pull inflation - Demand pull inflation is caused by an increase in aggregate demand. - An increase in consumption or investment or government expenditures or exports or the quantity of money → increases the aggregate demand. - A decrease in imports or taxes or interest rates → increases the aggregate demand Initial effect of an increase in aggregate demand: Price level LAS SAS The increase in demand raises the price level from 110 to 120 120 110 AD1 AD0 Real GDP Money wage rate response Price level LAS SAS1 130 ...
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...DEMAND FOR MONEY Chapter Outline • The Components of the Money Stock • Financial Innovation • The Functions of Money • The Demand for Money: Theory • Transactions Demand • The Precautionary Motive • The Speculative Demand for Money • Empirical Results for M2 Demand • The Income Velocity of Money • Working With Data Changes from the Previous Edition The material in this chapter has been updated, but the basic organization has not changed. Learning Objectives • Students should be able to identify the different functions of money. • Students should be familiar with the concept of money illusion. • Students should be able to identify the different monetary aggregates, especially M1 and M2, and they should know the approximate current values for M1, M2, V1, and V2. • Students should be able to identify some of the possible explanations for the increased instability of money demand the income velocity of money. • Students should be able to distinguish between the three different motives for holding money balances (transaction, precaution, and speculation). • Students should understand why the demand for money decreases with an increase in the interest rate and increases with an increase in income. • Students should know the implications of the square-root formula that is derived from the Baumol-Tobin transactions demand model. • Students should be aware that holding money has an opportunity cost. •...
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...the price of holding money and the opportunity cost of any investment. After analyzing interest rates in our course do you think that interest rate in Egypt reflects the real opportunity cost of holding money? Why or why not? Please support your answer with all the references you have searched. Interest Rate is: The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest is charged by lenders as compensation for the loss of the asset's use. In the case of lending money, the lender could have invested the funds instead of lending them out. That’s why interest rate should cover the opportunity cost of lending the money to the borrower. Also, interest rate should cover the inflation rate in the economy, as by time the lender receives the principal again due to inflation, the money will be of less value than when first lent to the borrower. So, if the interest rate doesn’t cover both the opportunity cost and inflation, it’ll be irrational decision to lend the money. For example, if the lender can invest in some real estate and construction projects with an average return of 10% & if inflation is 10%, then the interest rate should be more than 20% to be rational choice for the lender to lend the money. Interest rate in Egypt: (Lending Interest Rate) So, The lending interest rate is now at 9.75% annually, so, does this rate covers the inflation rate & opportunity cost of investing the money in some other activities...
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...develops new technology that lowers the costs of producing goods that they export, the opportunity cost of producing decreases, and they can increase the amount of goods that they supply. As a result, the new quantity supplied would be higher than the quantity demanded, a surplus would form, and the two markets will move into equilibrium where the price level is lower and the quantity supplied is greater than before. An overall lower price of goods in the European Union will increase domestic and foreign demand for their products. Citizens in the EU will substitute more expensive foreign goods for domestic goods and the quantity demanded for domestic goods will increase. Exports for the EU will increase, as foreigners are drawn into their lower prices. Imports will decrease because citizens of the EU are buying more domestic goods than foreign goods. The balance of trade in Europe will initially increase, as net exports are increasing. Due to the increases in production technology, the net exports in Europe are increasing. Because net exports are a component of real GDP, real GDP will increase. With an increase in real GDP comes an increase for the demand for money, as businesses and companies need more money to fuel their expansion. In return, banks will begin to increase interest rates on investment, making European financial assets more attractive to investors. The increased demand for European money on account of the increase in real GDP, the increase of foreign demand for...
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...greater output than the economy can produce and we need more cash to buy the same amount of goods as before and the value of money falls, so they have to compete in order to purchase limited amounts of products and services. Generally, the demand-pulled inflation result from any factor that increases aggregate demand. Also, an increase in export and two factors controlled by the government are increases in the quantity of money and increases in government purchases...
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...d. Accounting profit = total revenue – explicit costs iv. Explicit costs are payments firms make to purchase v. Resources (labor, land, etc.) and vi. Products from other firms e. Easy to compute f. Easy to compare across firms III. Economic Profit g. Economic profit is the difference between a firm's total revenue and the sum of its explicit and implicit costs vii. Also called excess profits h. Implicit costs are the opportunity costs of the resources supplied by the firm's owners i. Normal profit is the difference between accounting profit and economic profit viii. Normal profits keep the resources in their current use IV. Three Kinds of Profit j. Two Functions of Price ix. Rationing function of price distributes scarce goods to the consumers who value them most highly x. Allocative function of price directs resources away from overcrowded markets to markets that are underserved xi. Invisible Hand Theory states that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources 2. Articulated by Adam Smith in eighteenth century V. Responses to Profits and Losses k. Will the firm remain in business in the long run? xii. If it covers ALL of its costs l. Firms that earn normal profit recover only their opportunity cost...
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...actions compound upon one another to produce an outcome that isn’t simply the sum of those individual actions. (rubber-necking traffic jam example) * Paradox of thrift: when families and businesses are worried about the possibility of economic hard times, they prepare by cutting their spending. This reduction in spending depresses the economy as consumers spend less and businesses react by laying off workers. As a result, families and businesses may end up worse off than it they hadn’t cut their spending. * The flip-side is also true; seemingly profligate behavior leads to good times for all * Before 1930’s, economists regarded the economy as self-regulating: unemployment would be corrected through the invisible hand and government attempts would be ineffective/harmful. * Keynesian economics: a depressed economy is the result of inadequate spending. Government interaction can help a depressed economy through monetary and fiscal policies. * Monetary policy: uses changes in the quantity of money to alter interest rates; Fiscal policy: changes in taxes and...
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...| |[pic] | | | | | | | | | | | | | | |UNIT NO | | |DM4X 10 | | | | | |UNIT TITLE | | |OUTCOME 2 | | |THE UK ECONOMY | | | | | ...
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...Institutions Reform, Recovery, & Reinforcement Act (FIRREA)–authorized taxpayer funds to cover cost of liquidating failed thrifts, abolished current thrift regulatory structure, moved thrift insurance to FDIC, required insurance fund= 1.25% of insured deposits ABCT–there is no market mechanism that causes inflation or business cycles, the inflation of prices is an effect not a cause of economic disruption ABCT & unsustainable boom–the fed MS to interest and employment (I), not been a change in time preferences, the in interest sends the wrong signal & investment projects start to compete with consumption for resources, may not be noticed (slack resources get used), eventually C & I will have to bid up resource costs, inflation dampens I, so Fed further MS, effects are only temporary Actual inflation-exceeds inflation expectations, real ex post returns on bonds can be negative AD can shift – AD, shift right. AD, shift left. Whenever C, I, G, net x / due to changes in the money supply AD curve holding constant moving down –quantity of money AD for output–derived from the demand for money or from the real balance effect AD slopes downward–when the price level is lowered our money balances grow in real terms leading us to buy more Addressing the business cycle–stop inflating money, don’t bail out troubled firms, don’t inflate to get out of the depression, don’t encourage more consumption Adjusting for risk premiums, i still differs–by maturities, a positive term...
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...rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. The difference between inflation and a change in price of a particular good or service is that inflation reflects a general and overall increase in price across the whole economy In general, Inflation is caused by some combination of four factors. Those four factors are: Supply goes up or Supply of goods and services goes down or Demand for money goes down or Demand for goods and service goes up Inflation affects an economy in various ways, both positive and negative. Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Inflation also has positive effects: * Fundamentally, inflation gives everyone an incentive to spend and invest, because if they don't, their money will be worth less in the future. This increase in spending and investment can benefit the economy. However it may also lead to sub-optimal use of resources. * Inflation reduces the real burden of debt, both public and private. If you have a fixed-rate mortgage on your house, your salary is likely to increase over time due...
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...website : http://www.skynews.com.au/businessnews/article.aspx?id=738928&vId= The article ‘ Strong jobs figures put rate cut in doubt’ described that there is an increase in employment in the last one month which might help in putting hold to rate cut by Reserve Bank of Australia. There are positive signs in Australian job market with increase in 44000 employed people showing signs of recovery and better production levels. This will also increase private consumption giving rise to increased demand. Q1aii) This news article describes tradeoffs between interest rate cuts, inflation rate and unemployment rate. Q1aiii) First of all, this news article discusses the strong revival in the Australian job market seen in the month of March. More than 44000 jobs were created in the month of March across the nation which showed great signs of growth and production. It also says that unemployment rate is steady at the rate of 5.2 percent. The increase in number of jobs surpassed all the expectations of economists which estimated it to be 5000 in the month due to 15000 lost jobs in the month of February. Economists now estimate that due to strong job market and higher production levels, Reserve Bank of Australia (RBA) may undermine expected interest rate cuts. It had managed to keep cash rate at 4.25 percent but hinted at possible rate cuts in the month of May There are no signs that economy is underperforming but RBA would decide on possible rate cuts only after release of CPI data later...
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...Labour Law Managerial Monetary / Financial Natural resource Personnel Public / Welfare economics Regional Rural Urban Welfare Lists Economists Publications (journals) Portal icon Business and economics portal v t e In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.[1] When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy.[2][3] A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the consumer price index) over time.[4] Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage...
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...materialistic wants and desires continue to grow. - Newest camera phone - Larger television - Bigger house - Exotic vacation Why can’t we have everything we want? - Our wants exceed our resources. Economics and Opportunity Cost Economics – the study of how best to allocate scare resources among competing users. Opportunity cost – The value or price of the most desired goods and services that are foregone in order to obtain something else. - The next best alternative that you give up. Factors of Production Resource inputs used to produce goods and services. The four resources: - Labor, land, capital and entrepreneurship Resources are factors of production. Economic resources – all natural human and manufactured resources that can be used in the production of goods and services. Land – arable land, forests, minerals, energy (oil deposits and coal), water, air, wild plants, animals, birds and fish. Labor – all the physical and intellectual talents that can be used in the production of goods and services. Capital – all manufactured aids to production like tools, instruments, equipment, machines, factory, buildings, transportation, and distribution facilities that businesses use in producing goods and services. It does not include financial capital like money, stock, or bonds. Entrepreneurship – the social human resource that organizes labor,...
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...3 60 E 4 35 F 5 0 1) In the above table, the production of 3 pizzas and 80 cases of soda is 1) A) possible only if there is inflation. B) impossible unless more resources become available or technology improves. C) feasible but would involve unemployed or misallocated resources. D) possible only if the economy produces with maximum efficiency. 2) Economic growth can be pictured in a production possibilities frontier diagram by 2) A) shifting the production possibilities frontier outward. B) making the production possibilities frontier less bowed out. C) making the production possibilities frontier more bowed out. D) shifting the production possibilities frontier inward. 3) A person has an absolute advantage in an activity if that person can 3) A) perform that activity at a higher opportunity cost than anyone else. B) perform the activity at a lower opportunity cost than anyone else. C) produce fewer goods in a given amount of time than another person. D) produce more goods in a given amount of time than another person. 4) Comparative advantage is 4) A) the ability to perform an activity at a zero opportunity cost. B) the ability to perform an activity at a lower opportunity cost than anyone else. C) the ability to perform an activity at a higher opportunity cost than anyone else. D) identical to absolute advantage. 1 5) The kitchen manager at an Italian restaurant is deciding what assignments he should give to his two cooks...
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...Federal Reserve Paper Andy Martinez ECO/212 April 23, 2011 Boris Higgins Abstract * In this paper I will describe the purpose and function of money. It will show how the central bank manages a nation’s monetary system. Outline the stated direction of recent monetary policy in the United States, and last but not least, list one policy action that the Federal Reserve has taken to confirm that direction and the effects of monetary policies on the economy’s production and employment. * * * Money is limited by the central bank, and they decide the rate of the US dollar. Money is defined as the resources that individuals are normally ready to accept in the trade of goods and services or for disbursement of debts. The nation’s central bank also known as the Federal Reserve Bank and diverse tools are used to run and manage the financial policy. For this is the job of the Federal Reserve Bank. The Federal Reserve Bank is constantly evaluating the monetary solidity and building mandatory changes to the monetary policy in an effort to alleviate the economic vigor. Money was commonly formed to reinstate the barter system and is used consistently in the world’s economy in trade of goods and services. Money is used to achieve four functions that are medium of exchange, unit of account, store of value, and standard of deferred payment. Medium of exchange is activated when sellers are ready to acknowledge items in trade of goods or...
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