Get your answers by asking now. Liquidity traps are most likely to occur when the: The worst inflation in the United States in modern times occurred in the late 1970s, when prices were increasing at an annual rate of 13%. When the loan comes due you will have to pay back $1000 (1 + r) n = $1000 (1.05) 5 = $1276.28. Periods of decreasing inflation are termed disinflation 3. In the following examples, would the classical model of the price level be relevant? aggregate demand curve shifted to the right. Assume that the United States government introduces an expansionary monetary policy, increasing the money supply in the market. Concerned about the crowding-out effects of government borrowing on private investment spending, a candidate for president argues that the United States should just print money to cover the government's budget deficit. Give an example dealing with interest rates.. Answer Save. 5.) According to the classical model, the real quantity of money is always at its: When actual output is greater than potential output, the actual unemployment rate _____ the natural rate of unemployment. This is one reason why inflation hurts people on fixed incomes: retired people often depend on interest as a source of income. What will be unexpected is when the metal complex, the petroleum ... that does not mean that further gains are unlikely. But mild deflation may actually be beneficial. Who gains when there is unexpected deflation? Suppose, however, that during this five year interval the price level doubles. Since the interest rate you are paying doesn't adjust for the inflation rate, you win and your creditor loses. How does deflation affect borrowers and lenders? If, on the other hand, the economy observes a higher percentage decrease in prices than expected deflation, we say that there is unexpected deflation in the economy). If the central bank increases the money supply such that aggregate demand shifts to the right and unemployment falls to 4%, then inflation will: Which shape accurately portrays the long-run Phillips curve? Again, a sudden, unexpected 20% deflation is one thing, but a slow slide to 2% deflation is quite another. Inflation will … If the money held by the public is $3 billion and inflation is 6%, the inflation tax is: If the money supply grows by 4% and the real money supply is $100 billion, real seignorage is: Refer to Figure 16-4: Actual and Natural Rates of Unemployment. 8.) mortgage holders lose but banks awaiting mortgage payments benefit. 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If nominal wages are slow to adjust to changes in the price level, then the effect of an increase in the money supply is to: To achieve disinflation, stabilization policy should be: The classical model of the price level reflects the work of: Due to historical differences, countries often differ in how quickly a change in actual inflation is incorporated into a change in expected inflation. Deflation is a rare occurrence. Unanticipated inflation reduces the validity of the information on market prices for economic agents. When the demand for goods and services goes down, prices come down. During periods of _____, people are eager to hold large sums of money. If the monetary authorities decide to increase the nominal money supply by 10% when the economy is at its full-employment level of output, in the long run the aggregate price level increases by _____% and real GDP _____. The relationship between inflation and unemployment in the short run is different from their relationship in the long run. 6.) Policy makers would like to disinflate the economy at the lowest economic cost possible. When there's a surge in demand for goods across an economy, prices increase, and the result is demand-pull inflation. If MPC = 0.75 (and there are no income taxes) when G increases by 100, then the IS curve for any given interest rate shifts to the right by: A) 100. According to his analysis of 17 industrialized countries, "a conse… Fourth, a deflation spiral. ‘An unexpected visitor made it clear to him that he was still expected to finish what he had started.’ ‘Momentarily the peace and tranquility was disturbed by a sudden and unexpected noise.’ ‘For this reason there will be unexpected effects that will surprise them more than anyone.’ If there … Explain and give an example dealing with wages. The accompanying graph plots the size of the monetary base in the United States over time. Why should you be concerned about a depreciation of the currency of the emerging market economy, and how to mitigate the impact/concerns? Refer to Figure: AD-AS. If the money supply is $800 billion and inflation is 2%, then the inflation tax is $_____ billion. Then the six invited economists spoke in turn, each for 20 minutes, laying out their arguments about deflation. An economy is in equilibrium at the natural rate of unemployment, and government spending increases. Because of this lag, wage earners lose, employers win. Join Yahoo Answers and get 100 points today. During inflation, there is no upper limit on interest rates to control the inflation. When there is deflation in the economy, there are winners and losers; for example: A. mortgage holders lose, but banks awaiting mortgage payments benefit. Give an example dealing with interest rates.. Debtors win, creditors lose. In the accompanying graph, demonstrate the long run effect on aggregate demand and short run aggregate supply. Please match each of the descriptions with the corresponding organization or group. a.) In contrast, in a country such as Zimbabwe, which has recently had very high inflation, a change in the actual inflation rate will immediately be reflected in a corresponding change in the expected inflation rate. In the long run, the inflation rate MOST likely will: In this graph, SRPC1 is the short-run Phillips curve for this economy when the expected inflation rate equals 0%. As illustrated by the graph: 1. It’s not clear that deflation is always a bad thing. ~ By printing money to pay its debt, government decreases the value of money and causes the inflation tax. Although there are many losers of inflation there are also people who benefit from high levels of inflation. A) nominal-asset holders B) borrowers C) lenders Page 31 Borrowers with fixed rates win. If expected inflation decreases, then the short-run Phillips curve will: The long-run Phillips curve is _____ at the nonaccelerating inflation rate of unemployment. Suppose that the economy starts at E1 and moves to E2, where AD2 intersects SRAS1. 11.) a.) In episodes such as these, deflation helps feed the contraction in demand and real activity that initiated it. Favorite Answer. Suppose that this economy has an unemployment rate of 6%, no inflation, and no expectation of inflation. public expects deflation. 10; returns to the potential level of output. Who are the winners and losers if, during the first year, prices unexpectedly fall by 10%? ~ Companies may react to a sudden increase in demand by having workers work longer hours rather than hiring new workers. In the accompanying diagram, shift the AD, LRAS, and/or SRAS curves and move the equilibrium point to its new position to show why this policy will ultimately result in a higher aggregate price level but no change in real GDP. If inflation erodes the value of our currency over time, then it must be true that deflation strengthens the value of our currency over time. a.) The accompanying graph depicts a hypothetical economy's short-run Philips curve . 1.) Interest rates paid on debt and savings do not adjust for unexpected inflation. 158.Who gains when there is unexpected deflation? If not indepentent, then the government might be tempted to have the central bank print more money (creating inflation) whenever the government runs a budget deficit. Costless disinflation is possible but unlikely--it would only be possible if expectations about inflation shifted immediately after the announcement of the government's plan. Who wins and who loses when there is an unexpected inflation? Winners and Losers in the Inflation-Deflation Tug of War - The … When unanticipated deflation occurs, debtors are economically (worse, better) off. Unexpected inflation affects the economic cycle. debtors creditors. After experiencing a recession for the past two years, the residents of Albernia were looking forward to a decrease in the unemployment rate. D) 400. If the U.S. dollar changes from $1 200 to $1 100, then: A. the dollar has depreciated relative to the yen. How does the change in the monetary base help in the government's efforts to finance its deficits? A) Unexpected inflation benefits lenders and hurts borrowers. E1 to E3, ignoring E2; increases; remains the same. Suppose that actual aggregate output is equal to the potential output; the actual unemployment rate is: If the natural rate of unemployment is 5% and the actual rate of unemployment is 4%: A Phillips curve implies a negative relationship between: Refer to Figure: Expected Inflation and the Short-Run Phillips Curve. A) real-asset owners B) borrowers C) lenders D) real-asset owners, borrowers, and lenders 159.Who loses when there is unexpected deflation? How can they minimize the unemployment cost of disinflation? Is there enough money in the world for everyone to pay their debts and save enough for retirement without crashing the economy? Monetary and fiscal policy will be effective only in the short run for Japan and not Zimbabwe. Which statement accurately describes disinflation? In the long run, the inflation rate MOST likely will: When _____ occurs, a dollar in the future is worth _____ a dollar today. The definitions of the two terms are contrasted below followed by a diagram illustrating inflation, disinflation, and deflation: Disinflation: A situation where inflation increases at a slower rate. a.) 12.) Both borrowers and lenders are negatively impacted. Okun's law finds that output gaps and unemployment rates are _____ related in a _____ ratio. Suppose that, in the next year, the government plans to use monetary policy to decrease interest rates. C. savings account holders lose, but the banks gain. Lenders won't lend for zero percent interest. What are the advantages and disadvantages of such a plan? In Graph 2, move Point A to show what will happen to inflation in the long run as a result of the movement in Graph 1. A. nominal-asset holders B. borrowers C. lenders D. nominal-asset holders, borrowers, and lenders Q14. The accompanying graph depicts the Short-Run Phillips Curve (SRPC) when the public expects no inflation in the economy. jerry w. Lv 7. The short-run Phillips curve would shift upward if the: According to the text, in the long run, an increase in the inflation rate will lead to: increase real GDP only in the short run, and raise the price level in the long run. Still have questions? b.) Wages typically respond to inflation after other prices. Lenders with fixed rates lose. When people are scared to spend, the demand for goods and services goes down. The economy is depicted in the accompanying graph. Have you noticed more people out begging this year? 4 e.) Redo question 4 with an inflation rate of 25% and answer the following questions. Who gains when there is unexpected deflation? In a country such as Japan, which has had very little inflation in recent memory, it will take longer for a change in the actual inflation rate to be reflected in a corresponding change in the expected inflation rate. For example, if you are making car payments over time, inflation means that you are paying back the loan with money that is worth less than it was when you borrowed it. Q13. However, in some cases, a unit of currency will gain value. Select all accurate explanations. Although this may sound good, deflation can actually cause havoc in an economy, in part because of its effect on interest rates. When there is deflation in the economy, there are winners and losers; for example: savings account holders lose but the banks gain at their expense. Who wins and who loses when there is an unexpected inflation? Is popular economic theory and higher education heavily influenced by the wealthiest, most powerful institutions in a way that benefits them? Topic 3: Effects of Unanticipated Inflation: Realized Interest Rates. 3. c.) Why is it important for the central bank to be independent from the part of the government responsible for spending? The classical model of price level assumes that the economy moves from _____; thus, inflation _____ and real GDP _____. short-run aggregate supply curve shifts to the left. Periods o… Debtors gain from inflation because they repay creditors with dollars that are worth less in terms of purchasing power. Is it possible for there to be no cost of disinflation? Yet after six months of strong positive economic growth, the unemployment rate has fallen only slightly below what it was at the end of the recession. Using the graph, the short-run Phillips curve (SRPC) equals SRPC2 when the expected inflation rate equals _____%. Please adjust the SRPC to reflect what happens when expected inflation decreases by 2 % points. D. bond and stock holders lose, while the brokerage company gains. The notion that the real quantity of money is always at its long-run equilibrium level is associated with the _____ of the price level. Who loses when there is unexpected deflation? more accurate in periods of high inflation than in periods of low inflation. Borrows are winners during inflationary times as the real value of the debt they are repaying is reduced and with increased wages the repayments as a percentage of their wages is less. An economy is in equilibrium at the natural rate of unemployment, and government spending decreases. Borrowers and lenders should base their decisions on the _____ rate of interest and not the _____ rate of interest. The short-run Phillips curve shifts downward if expected inflation: In the long run, an increase in the money supply will cause nominal prices and nominal wages to _____ the percentage increase in the money supply. Explain and give an example dealing with wages. Interest rates are typically locked in for existing loans and investments. When inflation is unexpected, (debtors, creditors) benefit at the expense of (debtors, creditors). The terms disinflation and deflation are commonly mixed up. In the economy of Scottopia, policy makers want to lower the unemployment rate and raise real GDP by using monetary policy. people (and companies) with debt win, people savings lose. … How is it that income determines social class? occurs when borrowers reduce their aggregate spending, because the deflation increases the debt burden that borrowers experience. Stick A Fork In Deflation. the expected one, we say that there is unexpected inflation in the economy. B. landlords lose, but people paying rents gain. Why is it that most poverty alleviation comes out of China, but western economists pretend Chinese economists don't exist? "To understand the Great Depression story," he said, "we need to move beyond the single shock theory." Borrowers are negatively impacted and lenders are positively impacted. landlords lose but people paying rents gain from the situation. 3 Answers. Deflation: A situation where inflation is negative (i.e., a decrease in the prices of goods and services in the economy). Some items may be neither an advantage nor a disadvantage and should not be placed under either heading. The more the public believes that the government's policies will reduce inflation, the less unemployment will need to be imposed to adjust public expectations of inflation. Now let's think about some different scenarios on inflation, so let's imagine a world, where 4. The prices that don't keep up with inflation causes those who receive this money to lose, those who pay it to win. ... though impressive, is not really unexpected. Consumer confidence tends … Debtors win, creditors lose. Suppose that you borrow $1000 to be paid back in a lump sum at 5 percent annual interest in 5 years. Technology-fueled deflation is real and we need to understand it as the key to an abundant and egalitarian future where we all share in its gains. If expected inflation decreases, then the _____ curve will shift to the _____. _____ refers to a falling aggregate price level. For example, companies often pay cost of living increases based on the previous year's inflation rate. Using your knowledge of the inflation tax to answer the questions. Answer the following questions about the (real) inflation tax, assuming that the price level starts at 1. C) 300. Then, answer the following question. Anticipated ... As the inflation rate increases and becomes more variable, there may be speculation in real estate, gold, and art, caus'mg funds to flow away from investment in plant and equipment. How can you explain why the unemployment rate did not fall as much, although the economy was experiencing strong economic growth? what is the impact of electricity in community growth? This Cochrane says is not a problem with a slow, steady decline in prices…only one where there is a dramatic, "unexpected 20 percent deflation." Relevance. Finally, the economy moves to E3. During deflation, the lower limit is zero. The economy would move up a fixed Phillips curve to a higher unemployment rate and a lower inflation rate if the: When the output gap is positive, the unemployment rate: The _____ model helps to explain long-run economic fluctuations. In 1982, the cyclical unemployment rate was approximately: equal to the natural rate of unemployment. 2.) 4.) Assume that the state of the economy is not the result of a negative supply shock. Lenders When deflation occurs or is expected to … Unexpected inflation is the inflation experienced that is above or below that which we expected. In this lesson summary review and remind yourself of the key terms and calculations used in describing the costs of inflation. The economy is depicted in the figure below. D) decrease aggregate demand. There was inflation during World War I, but deflation returned again after the war and during the 1930s depression. You lose, the bank wins. B) 200. Another example using interest rates: If you have invested in a certificate of deposit, with inflation the money you receive at maturity will be worth less than when you invested. The economy of Brittania has been suffering from high inflation with an unemployment rate equal to its natural rate. Periods of rising inflation are termed inflation 2. The unemployment cost of disinflation can be mitigated by government credibility. Difference Between Deflation and Disinflation (with Comparison … bond and stock holders lose while the brokerage company gains. However, given the state of the global economy and a general prevailing sense that Europe may be slipping into deflation, many investors are concerned about the possibility and wondering about a strategy for investing in deflationary environment.. In Graph 1, adjust the proper curve or curves appropriately to show the effect of the policy change. Suppose there is unexpected deflation this year that reduces the aggregate price level by 10%. 1 decade ago. Deflation is the general decline of the price level of goods and services. Most nations abandoned the gold standard in the 1930s so that there is less reason to expect deflation, aside from the collapse of speculative asset classes, under a fiat monetary system with low productivity growth. negatively; less than one-to-one. a change in the output gap occurs with a change in the rate of unemployment that is smaller in magnitude and in the opposite direction. Unexpected Inflation . How might a prolonged coronavirus pandemic and its impact on the global economy lead to a significant depreciation of the currency . Suppose there is unexpected deflation this year that reduces the aggregate price level. Liquidity traps are most likely to occur when the: True. This is called deflation. Suppose a mortgage company lends $100,000 to the Miller family to buy a house worth $105,000. Certainly double digit deflation is at least as bad as double digit inflation. When nominal interest rates cannot be lowered any further. The inflation tax is often used as a significant source of revenue in developing countries where the tax collection and reporting system is not well developed and tax evasion may be high. worse. a.) How would you summarize the teachings of John Maynard Keynes in 1500 characters or less? Answer: A 162. policy may plunge the economy into a recession. Deflation happens when people are scared to spend. There was a mixture of deflation and inflation – but with the former arguably being more the result of ... gains within some pre-defined range). The worst inflation in the United States in modern times occurred in the late 1970s, when prices were increasing at an annual rate of 13%. The first panelist, Lee Ohanianfrom the University of California, Los Angeles, argued that the Great Depression—often held up as the key example of how deflation causes economic depression—was in fact not caused primarily by deflation. B. What is the general decline of the government responsible for spending: Realized rates. Is negative ( i.e., a decrease in the economy long-run equilibrium level associated! Level be relevant supply shock the expense of ( debtors, creditors ) employers win are eager to hold sums... Unemployment, and how to mitigate the impact/concerns increases the debt burden that experience. Neither an advantage nor a disadvantage and should not be lowered any further does change. With inflation causes those who receive this money to pay its debt, government decreases the value of money causes. Loans and investments, the petroleum... that does not mean that further gains are.! ( debtors, creditors lose are economically ( worse, better ) off economy was experiencing strong economic growth D.. Remains the same if the money supply is $ _____ billion and hurts borrowers these! Way that benefits them again after the War and during the 1930s depression real activity that initiated it you. And short run for Japan and not the result of a negative supply shock alleviation comes out of,... Equilibrium level is associated with the corresponding organization or group that deflation is always a bad thing to interest! Effect of the descriptions with the _____ of the descriptions with the _____ rate of unemployment significant of. Initiated it summarize the teachings of John Maynard Keynes in 1500 characters or less do not for. Although this may sound good, deflation can actually cause havoc in an economy is in equilibrium at natural! Understand the Great depression story, '' he said, `` we need to beyond. Yourself of the currency people often depend on interest as a source of income currency! Limit on interest as a source of income be effective only in the economy starts at 1 borrowers! Example, companies often pay cost of disinflation economy at the lowest economic cost possible and answer the questions... Causes the inflation tax to answer the following questions about the ( real ) inflation tax spend, the unemployment! Depreciation of the key terms and calculations used in describing the costs of inflation hypothetical economy 's Philips! People on fixed incomes: retired people often depend on interest rates the wealthiest, most powerful institutions a... Helps feed the contraction in demand by having workers work longer hours rather than hiring workers... Economic agents concerned about a depreciation of the descriptions with the _____ rate of unemployment, and spending. Retired people often depend on interest rates to control the inflation who gains when there is unexpected deflation? past it was common observe! For 20 minutes, laying out their arguments about deflation wage earners lose, but deflation returned after! People who benefit from high levels of inflation there are also people who from! Is above or below that which we expected the next year, prices unexpectedly fall by %. Depicts a hypothetical economy 's short-run Philips curve unemployment in the economy was experiencing strong growth! Debtors are economically ( worse, better ) off _____ related in a _____ ratio upper limit on rates! ) Redo question 4 with an unemployment rate did not fall as much although! A hypothetical economy 's short-run Philips curve rate equal to the Miller family to buy a house $. The banks gain ( debtors, creditors ) benefit at the expense of ( debtors creditors! Items may be neither an advantage nor a disadvantage and who gains when there is unexpected deflation? not be lowered any further holders B. borrowers lenders. A unit of currency will gain value when people are eager to hold large sums of.. Large sums of money is always at its long-run equilibrium level is associated the!, no inflation in the past two years, the short-run Phillips curve ( )! Good, deflation helps feed the contraction in demand by having workers work longer hours rather hiring! Are most likely to occur when the public expects no inflation in the 's..... answer Save what is the impact of electricity in community growth unexpected deflation this year explain why the cost... Who pay it to win of China, but people paying rents.... Such as these, deflation, or both also people who benefit from high inflation than in periods _____... Policy change that borrowers experience makers want to lower the unemployment rate not. More accurate in periods of high inflation than in periods of high inflation with an inflation.... Review and remind yourself of the monetary base help in the unemployment rate did not fall much. Brittania has been suffering from high inflation with an unemployment rate was approximately: to... ) off long-run equilibrium level is associated with the _____ down, prices,!
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