Ch8 Inflationmy8uimy8i

8/9/2019 Ch8 Inflationmy8uimy8i

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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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6

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.html


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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

21


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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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9:D

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Ch8 Inflationmy8uimy8i