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Economic Growth and Instability. Kati Hall (kmh5193) Victor Kolton (vsk5006) Nick Odle (nao5007) Dan Brandt (dmb5263). Inflation. Inflation is a rise in the general level of prices. When inflation occurs, each dollar of income will buy fewer goods and services than before.
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Economic Growth and Instability Kati Hall (kmh5193) Victor Kolton (vsk5006) Nick Odle (nao5007) Dan Brandt (dmb5263)
Inflation • Inflation is a rise in the general level of prices. When inflation occurs, each dollar of income will buy fewer goods and services than before.
Current Economic Issues with Housing • In the United States between 1987 and 1999 house prices, on average, stayed within the same price range. Only since 2000 have house price risen drastically. • In order to keep our economy out of a recession, the housing market will “boom”. The problem is this leads to inflation. • If interest rates rise, our economy will slow down causing the price of houses to fall back down. • The FED adjusts interest rates to balance the market.
Measurement of Inflation • The Consumer Price Index (CPI) is the main measure of inflation in the United States. • The CPI reports the price of a “market basket” of some 300 consumer goods and services that presumably are purchased by a typical urban consumer. CPI = price of the most recent market basket in the particular year _____________________________________ x 100 Price estimate of the same market basket
Demand-Pull Inflation • Where inflation is rapid and sustained, the cause is an over issuance of money by the Federal Reserve and when resources are already fully employed, the business sector cannot respond to excess demand by expanding output. This excess demand bids up the prices of the limited output, producing demand-pull inflation.
Cost-Push Inflation • When output and employment are both declining, but the general price level is still rising, cost-push inflation occurs.
Deflation • Those who have fixed nominal income will notice their real income rising. This leads to creditors benefiting from the expense of debtors. People’s money will in turn be worth more. • Deflation in the past was as much of a problem as inflation. Deflation is unattractive because the falling prices mean that incomes are also falling. This reduces employment, spending, output, and finally the price level. • The two factors that lead to deflation are that the currency must be strong enough that people want to hold on to it and the incapability of monetary authorities to create new money at will.
Interest Rates • The percentage that the borrower must pay the lender is known as real interest rates. • The nominal interest rates is the real interest rates except nominal interest rates include the expected rate of inflation.
A Short Term Fix • Recently the Federal Reserve lowered interest rates to stimulate spending in the economy. • This is a short term fix to a long term problem because more Americans will be in debt and living beyond their means. • A possible solution to this issue is have the banks cut down on issuing loans that borrowers won’t be able to pay back.
Sources Utilized • http://www.bankrate.com/brm/graphs/graph_trend.asp?tf=91&ct=Line&prods=10&gs=275,250&st=zz&c3d=False&web=brm&cc=1&prodtype=zzz&bgcolor=&topgap=&bottomgap=&rightgap=&leftgap=&seriescolor= • http://mysite.verizon.net/vodkajim/housingbubble/
