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Macroeconomics
Lecture 17
Inflation
Questions
Next ExamThursday
December 8th
Inflation Costs
shoeleather costsmenu costs
price variabilitytax liabilities
confusion and inconvenienceredistribution of wealth
Shoeleather Costs
trying to spend before prices go up
Menu Costs
constantly changing prices on things
Price Variability
distorts relative values between things.
market cannot allocate as well
distorts decisions
Tax Bracket Creepinflation makes nominal income
increase.
bump into a higher tax bracket
pay more tax with more real income
Confusion and Inconvenience
the length of a ruler changes
unit of account
bad money
Redistribution
Inflationborrowers gain
lenders lose
Deflationborrowers lose
lenders gain
Milton Friedman1912-2006
Quantity Theory of
Money
Quantity Theory of Money
M x V = P x YM = MoneyV = VelocityP = Prices
Y = Output
Quantity Theory of Money
MV = PYAssume V is constant
then an increase in M will only increase P or Y
Quantity Theory of Money
MV = PYIncreasing M will either
increase prices or output or both
Quantity Theory of Money
1. V is constant2. Change M will change P x Y3. Y is a function of capacity4. If M is increased then P is increased5. Therefore increasing M will increase inflation
Government Spending
taxborrow
Inflation Tax
When government prints too much money is
becomes less valuable.Anyone who has money
has lost value
Real vs. Nominal
Real Interest Rate =Nominal Rate - Inflation
Rate
R = N - I
Real vs. Nominal
Real = Nominal - Inflation
Nominal = Real + Inflation
Inflation = Nominal - Real
Indexing
Adjusting nominal rate for inflation
Three Tools of Central Banks
Open-Market Operations
Discount Rate
Reserve Ratio
Inflation Deflation
Winners Borrowers Lenders
Losers Lenders Borrowers
3.84x more productive
The Macroeconomics of Open Economies
Key Termsclosed economyopen economyexportsimportsnet exportstrade balancetrade surplustrade deficitbalanced trade
net capital outflownominal exchange rateappreciationdepreciationreal exchange ratepurchasing power parity
Global Device
ARM HoldingsWolfson Marvel
SkyworksCSR
Linear TechnologiesNXP
National SemiconductorSharp
SamsungToshibaInfineon
BroadcomNumonyx
MicronDialog Semiconductor
Texas InstrumentsSTMicroelectronics
Silicon StorageRF Microdevices
Cirrus Logic
U.S.U.K.
GermanyKoreaJapan
TaiwanChina
Saudi Arabia
450,000 iPhones and cost about $242,000 to charter, with fuel accounting for more than half the expense. 54 cents or around 2 riyals
44,700 gallons or 170,000 liters
Global Device
Made on Earth
New York City 1800
Trade can make everyone better off
Free to Trade
Open Economy
An economy that interacts freely with other economies
around the world
Closed EconomyAn economy that does not
interact with other economies around the
world
