Economy itself

Inflation

Rate at which the general level of prices for products is rising

Consumer Price Index (CPI)

Main way to calculate inflation

Tracks changes in price for consumers for a basket of products

Producers Price Index (PPI)

Other way to calculate inflation

Tracks changes in prices for producers commodity cost (inputs)

Demand pull inflation

When more is demanded (brought) than can be produced

Cost-push inflation

When increasing input (production) costs drive up prices (TINSTAAFL)

Wage-Price spiral inflation

Snowball Effect of higher prices resulting in need for higher wages, resulting in higher prices (input cost passed along), which results…

Consequences of inflation

Reduce purchasing power (buying less with same amount)

Risky speculation

Hurt lenders (results in higher interest rates and thus less borrowing)

Fiscal policy

Use of government taxing and spending to influence a country’s economy

Demand-side fiscal policies/Keynesian economic

Belief economic growth and full employment are most effectively created by high demand for products

Based on ideas of John Maynard Keynes

Main ideas of Keynesian economic

Use government spending to create full employment (they will build public goods to create better society) Ex. New Deal

Spending will increase demand (people spend money), increasing supply

Dw about deficits-economic growth and raising taxes later will pay for it

Multiplier

Rippling action of economic activity caused by government spending on products and direct payment

Spending causes greater increase in national income than og cost

Automatic stabilizer

Mechanisms automatically built into government budget that increase spending or decrease taxes when economy slows

Why government? Only government can act at a level that can change economy for a whole country

Recognition lag (problem with demand-side)

Can take 6+ months to recognize recession

Legislative lag (problem with demand-side)

Can take months-years-never for congressional action, even just modest action

Implementation lag (problem with demand-side)

Can take months for $ to get to people and businesses

Almost never cut programs or reduce spending once money sets in

Supply side fiscal policies/Regan economics

Belief economic growth and full employment are best created through high-supply of products

Alo call Regan economics or Trickle down economics

Main ideas of Supply side fiscal policies/Regan economics

Cut taxes for businesses and individuals - People will spend money businesses will reinvest money, creating jobs and economic growth, thus generating increased federal revenue

Cut federal spending and government regulations- reduce size of government and increase incentives for business to spend money (and government)

Privatize and de-regulate industry-Easier for businesses to expand and create growth

Problems with Supply side fiscal policies/Regan economics

Tax cuts don’t increase government revenue

Increase national deficit and debt

National deficit

When government spends more than it takes in from revenue each year

Borrows $ to pay for yearly deficit

Increase income and wealth inequality

National debt

Total amount borrowed to pay for early deficits

Entitlement/mandatory spending

Medicare, mediadid, interest

(required by law and automatically occurs unless the law is changed)

Discretionary spending

Defense, education, agriculture

(Decided each year through the budget process and can be changed or eliminated)