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. In the economy of Scottopia, policy makers want to lower the unemployment rate and raise real GDP by using monetary policy. If expected inflation decreases, then the short-run Phillips curve will: The long-run Phillips curve is _____ at the nonaccelerating inflation rate of unemployment. 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. How does the change in the monetary base help in the government's efforts to finance its deficits? When the demand for goods and services goes down, prices come down. But mild deflation may actually be beneficial. How is it that income determines social class? 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. Winners and Losers in the Inflation-Deflation Tug of War - The … Join Yahoo Answers and get 100 points today. ‘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.’ Periods of decreasing inflation are termed disinflation 3. D) 400. Give an example dealing with interest rates.. Answer Save. Unanticipated inflation reduces the validity of the information on market prices for economic agents. Who gains when there is unexpected deflation? Which statement accurately describes disinflation? If the money supply is $800 billion and inflation is 2%, then the inflation tax is $_____ billion. Assume that the state of the economy is not the result of a negative supply shock. B. 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 _____. Assume that the United States government introduces an expansionary monetary policy, increasing the money supply in the market. You lose, the bank wins. How would you summarize the teachings of John Maynard Keynes in 1500 characters or less? Debtors win, creditors lose. Using the graph, the short-run Phillips curve (SRPC) equals SRPC2 when the expected inflation rate equals _____%. aggregate demand curve shifted to the right. A) nominal-asset holders B) borrowers C) lenders Page 31 Periods of rising inflation are termed inflation 2. 4. Some items may be neither an advantage nor a disadvantage and should not be placed under either heading. 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. Although this may sound good, deflation can actually cause havoc in an economy, in part because of its effect on interest rates. Liquidity traps are most likely to occur when the: True. Suppose that this economy has an unemployment rate of 6%, no inflation, and no expectation of inflation. 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. Certainly double digit deflation is at least as bad as double digit inflation. The accompanying graph depicts a hypothetical economy's short-run Philips curve . ~ Companies may react to a sudden increase in demand by having workers work longer hours rather than hiring new workers. Lenders won't lend for zero percent interest. people (and companies) with debt win, people savings lose. 4 e.) Redo question 4 with an inflation rate of 25% and answer the following questions. 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). Suppose that, in the next year, the government plans to use monetary policy to decrease interest rates. Who are the winners and losers if, during the first year, prices unexpectedly fall by 10%? C) 300. a.) 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. In Graph 1, adjust the proper curve or curves appropriately to show the effect of the policy change. Give an example dealing with interest rates.. Debtors win, creditors lose. Determine whether each of the statements describes inflation, deflation, or both. How can they minimize the unemployment cost of disinflation? Suppose that the economy starts at E1 and moves to E2, where AD2 intersects SRAS1. Suppose there is unexpected deflation this year that reduces the aggregate price level. How can you explain why the unemployment rate did not fall as much, although the economy was experiencing strong economic growth? B. landlords lose, but people paying rents gain. bond and stock holders lose while the brokerage company gains. 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. ... though impressive, is not really unexpected. Debtors gain from inflation because they repay creditors with dollars that are worth less in terms of purchasing power. Refer to Figure: AD-AS. worse. The notion that the real quantity of money is always at its long-run equilibrium level is associated with the _____ of the price level. 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. Why should you be concerned about a depreciation of the currency of the emerging market economy, and how to mitigate the impact/concerns? Interest rates paid on debt and savings do not adjust for unexpected inflation. Deflation is the general decline of the price level of goods and services. debtors creditors. Is popular economic theory and higher education heavily influenced by the wealthiest, most powerful institutions in a way that benefits them? Borrowers and lenders should base their decisions on the _____ rate of interest and not the _____ rate of interest. Periods o… When nominal interest rates cannot be lowered any further. 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%. When people are scared to spend, the demand for goods and services goes down. Lenders with fixed rates lose. occurs when borrowers reduce their aggregate spending, because the deflation increases the debt burden that borrowers experience. How does deflation affect borrowers and lenders? In the long run, the inflation rate MOST likely will: When _____ occurs, a dollar in the future is worth _____ a dollar today. 10; returns to the potential level of output. Then, answer the following question. When there's a surge in demand for goods across an economy, prices increase, and the result is demand-pull inflation. What are the advantages and disadvantages of such a plan? negatively; less than one-to-one. Finally, the economy moves to E3. This is one reason why inflation hurts people on fixed incomes: retired people often depend on interest as a source of income. b.) 12.) 1.) a.) Suppose a mortgage company lends $100,000 to the Miller family to buy a house worth $105,000. Deflation happens when people are scared to spend. Suppose there is unexpected deflation this year that reduces the aggregate price level by 10%. 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. Deflation: A situation where inflation is negative (i.e., a decrease in the prices of goods and services in the economy). Get your answers by asking now. Favorite Answer. The economy is depicted in the accompanying graph. Borrowers with fixed rates win. Because of this lag, wage earners lose, employers win. 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. Who wins and who loses when there is an unexpected inflation? The economy is depicted in the figure below. An economy is in equilibrium at the natural rate of unemployment, and government spending increases. 5.) In this lesson summary review and remind yourself of the key terms and calculations used in describing the costs of inflation. The relationship between inflation and unemployment in the short run is different from their relationship in the long run. Although there are many losers of inflation there are also people who benefit from high levels of inflation. 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. Explain and give an example dealing with wages. A. nominal-asset holders B. borrowers C. lenders D. nominal-asset holders, borrowers, and lenders Q14. In 1982, the cyclical unemployment rate was approximately: equal to the natural rate of unemployment. public expects deflation. Again, a sudden, unexpected 20% deflation is one thing, but a slow slide to 2% deflation is quite another. In the United States, if there is a decrease in the expected inflation rate of 2%, then the short-run Phillips curve will _____ and the actual inflation rate will _____. If there … Florida GOP official resigns over raid of data scientist, Fox News' Geraldo Rivera: Trump's not speaking to me, Pornhub ends unverified uploads and bans downloads, Players walk after official allegedly hurls racist slur, Courteney Cox reveals 'gross' recreation of turkey dance, Trump vows to intervene in latest Texas election case, Family: Man shot by deputy 'was holding sandwich', Biden says reopening schools will be a 'national priority', Chick-fil-A files suit over alleged price fixing, Dez Bryant tweets he's done for season after positive test, Ex-Rep. Katie Hill alleges years of abuse by husband. The accompanying graph plots the size of the monetary base in the United States over time. Still have questions? Who loses when there is unexpected deflation? However, in some cases, a unit of currency will gain value. The prices that don't keep up with inflation causes those who receive this money to lose, those who pay it to win. The economy of Brittania has been suffering from high inflation with an unemployment rate equal to its natural rate. 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. 158.Who gains when there is unexpected deflation? This is called deflation. 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. 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. A) real-asset owners B) borrowers C) lenders D) real-asset owners, borrowers, and lenders 159.Who loses when there is unexpected deflation? a.) A) Unexpected inflation benefits lenders and hurts borrowers. 3. Who gains when there is unexpected deflation? Please match each of the descriptions with the corresponding organization or group. Suppose, however, that during this five year interval the price level doubles. 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. Monetary and fiscal policy will be effective only in the short run for Japan and not Zimbabwe. c.) Why is it important for the central bank to be independent from the part of the government responsible for spending? Unexpected inflation is the inflation experienced that is above or below that which we expected. As illustrated by the graph: 1. Answer: A 162. D) decrease aggregate demand. Lenders When deflation occurs or is expected to … Then the six invited economists spoke in turn, each for 20 minutes, laying out their arguments about deflation. 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. Have you noticed more people out begging this year? 4.) Is it possible for there to be no cost of disinflation? Answer the following questions about the (real) inflation tax, assuming that the price level starts at 1. When there is deflation in the economy, there are winners and losers; for example: A. mortgage holders lose, but banks awaiting mortgage payments benefit. mortgage holders lose but banks awaiting mortgage payments benefit. Since the interest rate you are paying doesn't adjust for the inflation rate, you win and your creditor loses. What will be unexpected is when the metal complex, the petroleum ... that does not mean that further gains are unlikely. Explain and give an example dealing with wages. 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. There was a mixture of deflation and inflation – but with the former arguably being more the result of ... gains within some pre-defined range). 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. During periods of _____, people are eager to hold large sums of money. 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. 6.) Now let's think about some different scenarios on inflation, so let's imagine a world, where 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. Suppose that you borrow $1000 to be paid back in a lump sum at 5 percent annual interest in 5 years. 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. There was inflation during World War I, but deflation returned again after the war and during the 1930s depression. 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%. Both borrowers and lenders are negatively impacted. The classical model of price level assumes that the economy moves from _____; thus, inflation _____ and real GDP _____. It’s not clear that deflation is always a bad thing. Unexpected Inflation . Relevance. 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. … An economy is in equilibrium at the natural rate of unemployment, and government spending decreases. "To understand the Great Depression story," he said, "we need to move beyond the single shock theory." Fourth, a deflation spiral. How might a prolonged coronavirus pandemic and its impact on the global economy lead to a significant depreciation of the currency . Who wins and who loses when there is an unexpected inflation? 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. B) 200. When unanticipated deflation occurs, debtors are economically (worse, better) off. In the past it was common to observe more rapid domestic policy may plunge the economy into a recession. For example, companies often pay cost of living increases based on the previous year's inflation rate. In the accompanying graph, demonstrate the long run effect on aggregate demand and short run aggregate supply. 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? 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. After experiencing a recession for the past two years, the residents of Albernia were looking forward to a decrease in the unemployment rate. The accompanying graph depicts the Short-Run Phillips Curve (SRPC) when the public expects no inflation in the economy. landlords lose but people paying rents gain from the situation. Unexpected inflation affects the economic cycle. _____ refers to a falling aggregate price level. 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%. 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." a.) During deflation, the lower limit is zero. 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. short-run aggregate supply curve shifts to the left. Wages typically respond to inflation after other prices. Difference Between Deflation and Disinflation (with Comparison … D. bond and stock holders lose, while the brokerage company gains. Policy makers would like to disinflate the economy at the lowest economic cost possible. Q13. ~ By printing money to pay its debt, government decreases the value of money and causes the inflation tax. Is there enough money in the world for everyone to pay their debts and save enough for retirement without crashing the economy? Select all accurate explanations. When inflation is unexpected, (debtors, creditors) benefit at the expense of (debtors, creditors). Okun's law finds that output gaps and unemployment rates are _____ related in a _____ ratio. 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. In episodes such as these, deflation helps feed the contraction in demand and real activity that initiated it. the expected one, we say that there is unexpected inflation in the economy. Why is it that most poverty alleviation comes out of China, but western economists pretend Chinese economists don't exist? According to his analysis of 17 industrialized countries, "a conse… a.) Interest rates are typically locked in for existing loans and investments. The unemployment cost of disinflation can be mitigated by government credibility. E1 to E3, ignoring E2; increases; remains the same. 2.) If expected inflation decreases, then the _____ curve will shift to the _____. Using your knowledge of the inflation tax to answer the questions. During inflation, there is no upper limit on interest rates to control the inflation. 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. Borrowers are negatively impacted and lenders are positively impacted. Inflation will … jerry w. Lv 7. Please adjust the SRPC to reflect what happens when expected inflation decreases by 2 % points. 11.) 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. In the following examples, would the classical model of the price level be relevant? Consumer confidence tends … When the loan comes due you will have to pay back $1000 (1 + r) n = $1000 (1.05) 5 = $1276.28. If the U.S. dollar changes from $1 200 to $1 100, then: A. the dollar has depreciated relative to the yen. more accurate in periods of high inflation than in periods of low inflation. what is the impact of electricity in community growth? Stick A Fork In Deflation. 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. 3 Answers. Deflation is a rare occurrence. C. savings account holders lose, but the banks gain. 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