Stagflation

1
Stagflation

• Chapter 15 Section 3

2
Objectives

• When the money supply rises, why does the output
  of goods and services rise before prices?
• When the money supply falls, why does the output
  of goods and services fall before prices?
• What causes stagflation?

3
Question

• What is stagflation?

4
Stagflation

• Inflation
• and
• High Unemployment
• at the same time
• USA 1974-1979
• Inflation Rate 4.7
• Unemployment increase 3.2

5
How Money Changes Affect the Economy Output 1st,
then Prices 2nd

• Fed increases Money Supply
• Total spending increases
• Firms are selling more goods
• Firms hire more people to
• produce more goods
• Later, prices increase (? value of )
• And Vise-versa

6
So What Do Firms Do?

• When firms sell more, it may be temporary.
• Ex. Sales last week good, this week
  not as good
• We did not raise prices because
• we want to remain competitive.
• If we raised our price, we would lose sales.

7
What Causes Stagflation?

• Stop-and-Go, On-and-Off Monetary Policy
• Increase Money Supply
• (Raise in output, then raise in prices)
• Raise in Price Level inflation
• Reduce Money Supply to counter inflation
• (Output decreases which leads to lay-offs and
  unemployment)
• Think of driving a car

8
Stagflation
Value
Output (Jobs)
C
Price Level
B
Time
A
9
Controversial

• Not all economists believe that stagflation is
  caused by stop-and-go monetary policy.
• Some economist believe stagflation is caused by
  a
• decrease in aggregate supply (fall of a
  natural resource, such as oil)

10
Price Level
AS
AS
B
A
AD
Quantity Output
11
Assessment

• When the money supply rises, why does the output
  of goods and services rise before prices?
• When the money supply falls, why does the output
  of goods and services fall before prices?
• What causes stagflation?