Chat with us, powered by LiveChat Week 4 Milestone 2 | excelpaper.org/
+1(978)310-4246 credencewriters@gmail.com
  

 Milestone 2 comprises reading from Weeks 3 and 4 (Chapters 29-33). Include these critical requirements in your submission:

  1. How do inflation, unemployment, aggregate demand, and supply in the company’s key market (country) affect the company’s profitability?
  2. Discuss the five transmission mechanisms (intertemporal substitution, uncertainty, and irreversible investments, labor adjustment costs, time bunching, and network effects and collateral damage) of the key market (country) and how it affects the company’s profitability.

MODERN PRINCIPLES OF ECONOMICS
Fifth Edition

Chapter 12 (31)
Inflation and the

Quantity Theory of
Money

© 2021 Worth Publishers. All Rights Reserved.

© 2021 Worth Publishers. All Rights Reserved.

Outline

• Defining and Measuring Inflation

• The Quantity Theory of Money

• The Costs of Inflation

• Takeaway

© 2021 Worth Publishers. All Rights Reserved.

Introduction

• Zimbabwe President Robert Mugabe’s policy of seizing
commercial farms drove away entrepreneurs and
investors.

• To bribe his enemies and pay the army, he simply
printed more money.

• The economy was flooded with money but could not
produce more goods.

• Prices went up: The inflation rate increased from 50%
per year to 50% per month to more than 50% per day.

© 2021 Worth Publishers. All Rights Reserved.

Definition (1 of 8)

Inflation:
An increase in the average level of prices.

© 2021 Worth Publishers. All Rights Reserved.

Inflation (1 of 4)

• Inflation is measured by changes in a price index.
• The inflation rate is the percentage change in a price

index from one year to the next.

100rate Inflation
1

12 ×
−

=
P

PP

where P2 is the index value in year 2 and P1 is the
index value in year 1.

© 2021 Worth Publishers. All Rights Reserved.

Inflation (2 of 4)

© 2021 Worth Publishers. All Rights Reserved.

Self-Check (1 of 5)

If the price index is 200 in year 1 and 210 in year 2, the
rate of inflation is:

a. 4.76%.

b. 5%.

c. 20%.

© 2021 Worth Publishers. All Rights Reserved.

Self-Check (1 of 5) (Answer)

If the price index is 200 in year 1 and 210 in year 2, the
rate of inflation is:

a. 4.76%.

b. 5%.

c. 20%.

Answer:

b. The rate of inflation is (210 – 200) / 200 × 100 = 5%.

© 2021 Worth Publishers. All Rights Reserved.

Price Indexes

1. Consumer price index (CPI): Measures the average
price for a basket of goods and services bought by a
typical American consumer; covers 80,000 goods and
services and is weighted so major items count more.

2. GDP deflator: The ratio of nominal to real GDP
multiplied by 100; covers finished goods and services.

3. Producer price indexes (PPI): Measure the average
price received by producers; includes intermediate and
finished goods and services.

© 2021 Worth Publishers. All Rights Reserved.

Relevance of CPI as a Price Index

• For Americans, CPI is the measure of i

MODERN PRINCIPLES OF ECONOMICS
Fifth Edition

Chapter (32)
Business Fluctuations:

Aggregate Demand and
Supply

© 2021 Worth Publishers. All Rights Reserved.

© 2021 Worth Publishers. All Rights Reserved.

Outline

• The Aggregate Demand Curve

• The Long-Run Aggregate Supply Curve

• Real Shocks

• Aggregate Demand Shocks and the Short-Run Aggregate Supply
Curve

• Shocks to the Components of Aggregate Demand

• Understanding the Great Depression: Aggregate Demand Shocks
and Real Shocks

• Takeaway

© 2021 Worth Publishers. All Rights Reserved.

Introduction (1 of 4)

• Economic growth is not a smooth process.

• Real GDP in the United States has grown at an
average rate of 3.2% per year over the past 65 years.

• The economy rarely grew at an average rate.

• Growth fluctuated from −5% to more than 8%.

• Recessions are of special concern to policymakers and
the public because unemployment typically increases
during them.

© 2021 Worth Publishers. All Rights Reserved.

Definition (1 of 7)

Business fluctuations:
Fluctuations in the growth rate of real GDP around its
trend growth rate.

Recession:
A significant, widespread decline in real income and
employment.

© 2021 Worth Publishers. All Rights Reserved.

Introduction (2 of 4)

Quarterly growth rate in real GDP, 1948–2019

© 2021 Worth Publishers. All Rights Reserved.

Introduction (3 of 4)

U.S. civilian unemployment rate, 1948–2019

© 2021 Worth Publishers. All Rights Reserved.

Introduction (4 of 4)

• To understand booms and recessions, we will develop
a model of aggregate demand and aggregate supply
(AD–AS), with three curves:
– Aggregate demand curve
– Long-run aggregate supply curve
– Short-run aggregate supply curve

• The AD–AS model shows how unexpected economic
disturbances or “shocks” can temporarily increase or
decrease the rate of growth.

© 2021 Worth Publishers. All Rights Reserved.

Definition (2 of 7)

Aggregate demand curve:
Shows all the combinations of inflation and real growth
that are consistent with a specified rate of spending
growth:

+
 
M v

© 2021 Worth Publishers. All Rights Reserved.

The Aggregate Demand Curve (1 of 4)

• We can derive the AD curve using the quantity theory of
money in dynamic form:

( )

+ = +

=

=

=

=

   







where :
Growth rate of the money supply

Growth in velocity
Growth rate of pr

MODERN PRINCIPLES OF ECONOMICS
Fifth Edition

Chapter (33)
Transmission and

Amplification
Mechanisms

© 2021 Worth Publishers. All Rights Reserved.

© 2021 Worth Publishers. All Rights Reserved.

Outline

• Intertemporal Substitution

• Uncertainty and Irreversible Investments

• Labor Adjustment Costs

• Time Bunching and Network Effects

• Collateral Damage

• Takeaway

© 2021 Worth Publishers. All Rights Reserved.

Introduction (1 of 2)

• Economic forces can amplify shocks and transmit them
across sectors and through time.

• A mild negative shock can be transformed into a
serious reduction in output.

• A positive shock can be transformed into a boom.

• Real shocks and aggregate demand shocks can
interact, with one leading to the other.

© 2021 Worth Publishers. All Rights Reserved.

Introduction (2 of 2)

• This chapter focuses on five transmission mechanisms:

1. Intertemporal substitution

2. Uncertainty and irreversible investments

3. Labor adjustment costs

4. Time bunching and network effects

5. Collateral damage

© 2021 Worth Publishers. All Rights Reserved.

Intertemporal Substitution (1 of 4)

• People are most likely to work hard when hard work brings
the greatest return.

• As a test approaches, you probably study harder and give
up opportunities to have fun.

• Once the test is over, you study less and have more fun.

• During a boom, people are less likely to retire or take early
retirement.

• Substituting effort across time is called intertemporal
substitution.

© 2021 Worth Publishers. All Rights Reserved.

Definition (1 of 6)

Intertemporal substitution:
The allocation of consumption, work, and leisure across
time to maximize well-being.

© 2021 Worth Publishers. All Rights Reserved.

Intertemporal Substitution (2 of 4)

Intertemporal substitution: percentage deviation from trend in
GDP and the employment–population ratio, 1950–2010

© 2021 Worth Publishers. All Rights Reserved.

Intertemporal Substitution (3 of 4)

• When there is a downturn, people work less and invest
less.

• The ripple effects turn an initial shock into a broader
recession.

• Intertemporal substitution can also feed an economic
boom and make it more intense.

© 2021 Worth Publishers. All Rights Reserved.

Intertemporal Substitution (4 of 4)

© 2021 Worth Publishers. All Rights Reserved.

Self-Check (1 of 3)

Interte

error: Content is protected !!