Answer any one of the following 3 questions in essay form Your essays will be gr

Question

Answer any one of the following 3 questions in essay form Your essays will be graded on the clarity of thought as expressed in your writing, soundness of reasoning degree to which you address yourself to the question, use of examples, and econoemic content. You may not copy your answers from the book or any other resource. That constitutes plagiarism and will result in ne credit given for your essays Note: The College uses Tunitin" a software program that easily detects plagiarism 1The US economy grew hardly at all in 2011. Discuss the consequences this had on the U.S. economy. Explain how economic growth is achieved. 2. What is meant by "full employment? Why is full employment desirable? Can we have both full emplayment and unemployment at the same time? 3. What is inflation? Why is it a macroeconomics problem? How does it occur? HTMLEdi Paragaph

Explanation / Answer

Inflation is the rising price of goods and services over time. It's an economics term that means you have to spend more to fill your gas tank, buy a gallon of milk or get a haircut. Inflation increases your cost of living.

Inflation reduces the purchasing power of each unit of currency. U.S. inflation has reduced the value of the dollar. Compare the dollar's value today with that in the past.

As prices rise, your money buys less. That's how inflation reduces your standard of living over time. That's why President Reagan said, "Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man." Here's more on how inflation impacts you life.

The inflation rate is the percent increase or decrease of prices during a specified period. It's usually over a month or a year. The percentage tells you how quickly prices rose during the period. For example, if the inflation rate for a gallon of gas is 2 percent a year, then gas prices will be 2 percent higher next year. That means a gallon that costs $2.00 this year will cost $2.04 next year.  

If the inflation rate is more than 50 percent a week, that's hyperinflation. If inflation occurs at the same time as a recession, that's stagflation. Rising prices in assets like housing, gold or stocks are called asset inflation.

Inflation is a macroeconomic phenomenon because the prices of most of the goods and services rise and the entire economy is affected not just one firm or industry.

Causes of inflation:There are basically two causes-demand pull and cost push.

Demand-Pull Inflation:

Demand-pull inflation is the most common. It's when demand for a good or service increases so much that it outstrips supply. If sellers maintain the price, they will sell out. They soon realize they now have the luxury of raising prices, creating inflation.

Five circumstances lead to demand-pull inflation. A growing economy creates inflation as people are confident and spend more. That further benefits economic growth by creating an expectation of inflation. That motivates them to buy more now to avoid further price increases. The Federal Reserve sets an inflation target to manage the public's expectation of inflation. It's at 2 percent as measured by the core inflation rate. The core rate removes the effect of seasonal food and energy increases.

Discretionary fiscal policy contributes to demand-pull inflation. The government's ability to spend more or tax less increases demand in some areas of the economy. Marketing and new technology create demand-pull inflation for particular products or asset classes.

For example, Apple's branding commands higher prices for its products. New technology also occurred in the form of financial derivatives.

It created asset inflation in the housing market in 2005.

Over-expansion of the money supply can also create demand-pull inflation.

The money supply is not just cash, but also credit, loans and mortgages. When the money supply expands, it lowers the value of the dollar. When the dollar declines relative to the value of foreign currencies, the prices of imports rise. That also creates cost-push inflation.

How does the money supply increase? Through expansionary fiscal policy or expansionary monetary policy.

The Federal government executes expansionary fiscal policy. It expands the money supply through either deficit spending or printing more cash. Deficit spending pumps money into certain segments of the economy. It creates demand-pull inflation in that area. It delays the offsetting taxes, thus adding it to the debt. It has no ill effect until the ratio of debt to gross domestic product approaches 90 percent.

The Federal Reserve controls expansionary monetary policy. It expands the money supply by creating more credit with the use of its many tools. One tool is lowering the reserve requirement. It's the amount of funds banks must keep on hand at the end of each day. The less they have to keep on reserve, the more they can lend.

Another tool is lowering the fed funds rate. That's the rate banks charge each other to borrow funds to maintain the Reserve requirement.

This action also lowers all interest rates. That allows borrowers to take out a bigger loan for the same cost. Lowering the fed funds rate has the same effect, but is a lot easier. Therefore, it's done much more often. When loans are cheap, then there will be too much money chasing too few goods, creating inflation. The prices of everything increases, even though neither demand nor supply has changed.

Cost-Push Inflation

The second cause is cost-push inflation. It only occurs when there is a supply shortage combined with enough demand to allow the producer to raise prices. There are five contributors to inflation on the supply side. Wage inflation increases salaries. It rarely occurs without active labor unions. A company with the ability to create a monopoly also creates cost-push inflation.

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