Chapter 2: Economic Systems and the American Economy

2.economic system and the american economy from jtoma84

Example of a Circular Flow Model:

I. Inflation
A. Definition: Inflation means that the general level of prices is going up, the opposite of deflation. More money will need to be paid for goods (like a loaf of bread) and services (like getting a haircut at the hairdresser's). Economists measure inflation regularly to know an economy's state. Inflation changes the ratio of money towards goods or services; more money is needed to get the same amount of a good or service, or the same amount of money will get a lower amount of a good or service.

B. Causes: When the total money in an economy (the money supply) increases too rapidly, the quality of the money (the currency value) often decreases. Economists generally think that this money supply increase (monetary inflation) causes the goods/services price increase (price inflation) over a longer period. They disagree on causes over a shorter period. NOTE: Later in the Semester (Chapter 7- we will examine shorter periods of time and potential reasons)

II. Deflation:
A. Definition: Deflation means that generally the prices of products are going down. It is the opposite of inflation. It is said, that deflation happens when there is less money than there are goods (goods are almost any kind of product). It is also said that deflation is a sign of a weak state of that country's economy, because deflation usually happens during an economic collapse. Deflation is thought to be even worse than inflation.

B. Potential Causes: Deflation starts when people are waiting for prices to go down even more. They will then spend less money. Because of that, companies can not afford to keep up the amount of goods that are made, and have to lower that amount, as well as fire workers to make even a small profit.

**The Importance of Equity

Equity's value in regards to economic choice and systems is substantial. It directs the choices businesses make about how their resources are used.

**The importance of Free Enterprise

Free Enterprise allows for competition. Competition in the market is ideal because it allows for products to increase in quality and a more affordable price for the benefit of the consumer.