Post on 01-Jun-2018
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Chapter 8
Inflation
These slides supplement thetextbook, but should notreplace reading the textbook
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What is inflation?A pervasive and
general rise in theaverage price level
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What is theConsumer Price Index?
The CPI measures theprice increases of a
particular basket ofgoods and services
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What is the pricemechanism?
The adjustment of pricesin response to changing
market conditions
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Is any increase inprices inflationary?
No, some prices willalways increase
because of the pricemechanism
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What three roles doprices play?
convey informationgive incentivesprovide working capital
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Which two categoriesis left out of the coreinflation rate?
ood and energy
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What is the recent
history of inflation?!"#$ to !"#% & %' annually
!"#% to !"() & *' annually!"$" to !"(" prices doubled
Currentlyhttp+www-forecast&chart-comforecast&inflation&rate-html
http://www.forecast-chart.com/forecast-inflation-rate.htmlhttp://www.forecast-chart.com/forecast-inflation-rate.htmlhttp://www.forecast-chart.com/forecast-inflation-rate.htmlhttp://www.forecast-chart.com/forecast-inflation-rate.html8/9/2019 Ch8 Inflationmy8uimy8i
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Why is inflation calledan arbitrary tax?
.ecause it lessonspeople/s disposableincome while effectingthem randomly
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Who measuresinflation?
It is published monthlyby the .ureau of0abor 1tatistics
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What is the consumerprice index (CPI)?
A measure of the cost ofa fi2ed 3market basket4
of consumer goodsand services
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Does this fixedbas!et" change?
As people/s tastes andpreferences change,
what goes into thebasket will change
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If inflation is #$% and you
get a &% raise' what hashappened to your money
income? real income?5our moneyincomehas increased by ('but your realincomehas decreased by 6'
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What is the percent
increase from$'$$$ to *'$$$?
Take the difference and divideby the original number
*'$$$+$'$$$ , -.&%
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If your income goes up
from $'$$$ to *'$$$and inflation is /%' are
you better or worse off?5ou are better off because
your real income hasincreased by !-('
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What is the0ule of &*?
Take any incrementalincrease and divide into(* & the result will tell you
how long it will take thevalue to double
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1t *% how long will it ta!efor prices double?
6$ years
1t #$% how long will it ta!efor prices to double?
(-* years
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What gi2esanything 2alue?
7sefulness andlevel of scarcity
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What gi2esa country3s currency
2alue?The goods and servicesof a country which there
is a demand
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Is there anything wrongwith a slow and steady
rate of inflation?
No, especially whenthe inflation rate is
anticipated
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4ow does inflationchange society?
It breeds uncertainty,diminishes buying power,erodes real savings, causes
unemployment, alters socialtraditions, and confuses theprice mechanism
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4ow did the inflation ofthe #5&$3s effect society?
ast food restaurantsTwo income familiesChange in family styles
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What causes inflation?The money supply has to
increase more thangoods and services
increase
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What does theforeign sector ha2eto do with inflation?
If more money entersthe country thanleaves, the moneysupply increases
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What is thee6uation of exchange?
89 : P;
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MV = PQ
8oney
9elocity
Price;uantity
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What determines theprice le2el?
89; : P
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What can lower therate of inflation?
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Who influences ourmoney supply?
The ederal =eserve >ed?
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Do go2ernmentmandated pricecontrols wor!?
N@, they simply alter theeconomic system, for
e2ample, shortages inthe former 1oviet 7nion
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D
SSurplus
Shortage
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Can businesses or
consumers causeinflation?
8aybe for a short time,but very uickly prices
will come down due to alack of buying power
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Who is hurt the mostby inflation?
Anyone on a fixedincomeis hurt the mostby inflation
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Who is hurt themost and the leastby inflation?
The elderly are hurt the
most, young marriedcouples are hurt the least
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4ow does inflation
affect lenders andborrowers?
lenders are hurt more if theinflation is unanticipated
borrowers are hurt more ifthe inflation is anticipated
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What is
demand7pull inflation?A sustained rise in the
price level caused byincreases in
aggregate demand
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Will any increase indemand cause inflation?
No, it depends onwhere the aggregatedemand curve falls on theaggregate supply curve
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Aggregateupply Cur2e
S
d1 d2d3
d4 d5
P
Q
d6
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Is it easy to fightdemand pull inflation?
Yes! Bhen we lowerdemand prices will
soon drop
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What issupply side inflation?
Inflation caused byreductions inaggregate supply
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What iscost7push inflation?
An increase in costsleading to an increasein prices
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Is it easy to fight
cost push inflation? Bhen we lower
demand with cost pushinflation it will take longer
before prices decline
No!
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4ow bad was the inflationrate of the #5&$s?
Inflation average !)' ayear during the !"()s
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What caused theinflation of the #5&$s?@PC greatly increased the
price of oil in the early ()s7nion bargained for higher
wages greater than theirincrease in productivity
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What iscreeping inflation?
The slow but steadyincrease in prices
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What is hyperinflation?
A very high rate of inflation
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What is an exampleof hyperinflation?
In !"*6 the Derman markinflated from *,))) tothe dollar to # trillion *))
billion to the dollar
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What is deflation?
A sustained decreasein the price level
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What is disinflation?
A reduction in therate of inflation
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What doesinterest mean?
The dollar amount paid tolenders to forgo present
consumption and imposedon borrowers
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What isinterest rate?
Interest per year as apercentage of the
amount loaned or lent
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4ow are sa2erseffected by inflation?
Bith an inflation rate of6' and an interestrate of 6', a saver
breaks even, notconsidering theincrease in their ta2es
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What is thenominal rate of interest?
The interest ratee2pressed in currentdollars as a percentage
of the amount loaned
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What is the
real rate of interest?The interest rate
e2pressed in dollars ofconstant purchasing
power as a percentageof the amount loaned
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4ow do we measure thereal rate of interest?
The nominal rate of interestminus the inflation rate
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Why does higher
inflation cause higherinterest rates?
0enders have to berewarded in real terms
Also, the ederal =eservemay raise interest rates
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4ow are in2estors
effected by inflation?.ecause investors make
decisions based one2pectations,
unanticipated inflationleads to uncertainty and adecline in investments
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What fiscal policieswould we use to bringdown inflation?
Cut government spending=aise ta2es to pay debt=ela2 trade restrictionsIncrease productivity
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4ow to protect yourselffrom hyper inflation?
real estateart
gold
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