CLEP Macro Economics

If ned has 100000 home mortgage at 4 fixed inflation

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If Ned has $100,000 home mortgage at 4% fixed, inflation rises to 15%, Ned benefits in this situation, the dollars used to repay the loan are worth less than when Ned took out the loan Inflation is found by subtracting the second year from the first year, example one year is 130, next year is 135, (135-130) and divide the result (5) by the first index year (5/130=3.8) Disinflation – an extreme decline in the rate of inflation Can lead to high levels of unemployment and recessionary gaps Inflation Shock – occurs when inflation suddenly deviates from its normal course Can either be adverse or favorable Aggregate supply shocks decrease economic output and increase inflation rates Aggregate supply shock can be a result of inflation shock or shocks to potential outputs Deflation – when prices fall consistently over time, leading to negative inflation Caused by reduction in the supply of money, higher interest rates, or lack of credit Reductions in government spending and personal spending can cause deflation Prices fall while income remains stable or increases Stagflation – occurs when the supply curve is shifted to the left (inward) by an increase in resource costs, leading to higher inflation (higher prices of goods) and higher unemployment Also referred to as cost-push inflation Phenomenon because it goes against principle of Phillips relationship—high inflation and high unemployment cannot occur simultaneously Occurred in the U.S. in the 1970s when supply of oil dropped significantly and energy prices skyrocketed Steps for fixing stagflation: o Technological advancements and increased resource availability o Shifting the aggregate supply (AS) curve to the right Recession – a period of slow economic growth A GDP that last more than two-quarters (6 months) End of a recession is generally noted by a decline in inflation If an economy’s outputs fall below potential GDP, recession will occur, driving prices down o During a recession the government deficit increases by taking in less tax revenue, paying out more unemployment benefits and welfare payments, resulting in the national income remaining relatively high as people have money in their pockets due to paying less in taxes, etc. o During a recession the Fed would be likely to use Expansionary Monetary policies and buy U.S. Treasury securities in order to put money into banks cash reserve, in turn banks have money to lend, can lower interest rates, and these actions will increase the money supply and stimulate the economy Peak Recession – is the beginning of the recession Highest level of economic activity prior to the downturn Trough – the lowest point of the recession Usually signals the end of a recession Depression – is a severe recession
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Gross Domestic Product (GDP) - The market value of all goods and services within a nation during a specified time Estimated quarterly by the Bureau of Economic Analysis (BEA) Consumption + Government Expenditures +Investments +Exports –Imports = GDP Market value of good PRODUCED -
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If Ned has 100000 home mortgage at 4 fixed inflation rises...

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