it says high inflation and uncertainty about inflation decreases savings and investments and reduces current potential real gdp and the growth rate of potential gdp over time. it says that savings and investment are less attractive than current consumption in these cases. wouldn’t current consumption INCREASE gdp growth?
ryanwtyler Wrote: ------------------------------------------------------- > it says high inflation and uncertainty about > inflation decreases savings and investments and > reduces current potential real gdp and the growth > rate of potential gdp over time. it says that > savings and investment are less attractive than > current consumption in these cases. wouldn’t > current consumption INCREASE gdp growth? not sure what you are asking dude, but the takeway is that higher prices = higher inflation, when people see high prices, they feel poorer and consume less. Because Americans are consuming less, the GDP falls and aggregate demand weakns. The kicker: Fed raises rates to curb inflation and the higher rates compel people to toss more $ in the bank – ie. SAVE that’s it. BOOM
No. the book says people consume MORE. they save and invest less which causes gdp to slow.
ryanwtyler Wrote: ------------------------------------------------------- > No. the book says people consume MORE. they save > and invest less which causes gdp to slow. oh, i re read the question, they say potential GDP, not real GDP. That could be it…not sure, can you post the question please ???
no questions. i’m just trying to make econ, in general, make sense. so if they ask a question like “what happens when inflation is high?” i can use logic to asnwer the questions
ryanwtyler Wrote: ------------------------------------------------------- > no questions. i’m just trying to make econ, in > general, make sense. so if they ask a question > like “what happens when inflation is high?” i can > use logic to asnwer the questions it will start a process in which Fed will have to increase rates, lower the $ supply, and sell govt bonds that is one way to see it
Don’t think so much in terms of individuals, not entirely anyway. A large part of that word “investment” and GDP comes from business demand and business spending. Yes, individuals invest, but what we think of investing is really saving for retirement (i.e. 401k, IRA, etc.). Investment goods, such as factories and office buildings (i.e. PPE), make up the actual real income of a nation, or the national output. You speculating on a stock or purchasing a bond does not increase GDP, and I think this is where you are finding the confusion. Our incomes depend on people spending their money, and if businesses and/or consumers cut back on their spending, aggregrate income declines and this slows aggregrate demand (depending on your school of thought of course). To answer your question, look up the term “fallacy of composition”. Yes, current consumption WOULD increase GDP growth, but not simultaneously coupled with weakened business investment.