Money supply inflation

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Money supply inflation

  1. 1. Short Quiz Name the type of unemployment (F = frictional, C = Cyclical, S = Structural) 1. Recent college graduates 2. Former Myspace employees 3. Waitress laid off because of fewer customers 4. Calculate the unemployment rate of Travistan: 30 million people in labor force 3 million discouraged workers 10 million unemployed and looking for work 5. Calculate the GDP of Travistan in billions Black Market = $ 10 Consumer spending = $15 Investment = $6 Government = $4 Imports = $10 Exports = $5 6. Calculate Travistan’s GDP per capita if there are 20 million citizens 20 million = .02 billion 7. Is this a rich or poor country?
  2. 2. Definition of money • Medium of exchange • Unit of Accounting • Store of Value
  3. 3. Money Commodity money
  4. 4. Currency Rome
  5. 5. Currency Ancient China
  6. 6. Currency Representative Currency Advantages? Disadvantages?
  7. 7. Currency Fiat Currency
  8. 8. Currency Fiat Currency
  9. 9. Currency Fiat Currency
  10. 10. Currency Fiat Currency
  11. 11. Fiat Currency Advantages? Disadvantages? Currency
  12. 12. The Euro conversion to US 1.50 Fiat Currency Advantages Disadvantages? US/Mex/Can?
  13. 13. Foreign exchanges
  14. 14. Near Money • Debit cards • Gift Cards • Financial Assets
  15. 15. Inflation • Rise in prices over time • “cost of living” • “The real value of currency”
  16. 16. GDP • GDP = C + I + G + (Exports – Imports) • Which one is affected by inflation?
  17. 17. Why does inflation happen?
  18. 18. Zimbabwe Population: 13 million GDP: 4.72 billion GDP/Capita: $402 Unemployment: 66%
  19. 19. Your G3 is advising the President of Zimbabwe on how to improve the economy of his country. Situation: Many blacks can not afford goods and food in the markets. Business owners are allowed to charge whatever price they want and since food is hard to find, its very expensive. Local Zimbabwe businesses have a difficult time competing with imports from the USA, South Africa and England. When Zimbabwe businesses fail, people lose their jobs causing more unemployment. 98% of the farm land is owned by white farmers, which was taken in the 1800’s from native Africans. 90% of this country is black and has no access to this farm land. The white farmers pay low wages and often do not hire native blacks. Many people in Zimbabwe do not have much money to buy food with. The Zimbabwe dollar is a strong currency which is difficult to get much of because the central bank doesn’t print very much.
  20. 20. Zimbabwe CAUSE Fixed prices Banned imports Redistributed land Printed up more money EFFECT shortages More shortages Still more shortages inflation President Robert Mugabe Technically “hyperinflation”
  21. 21. What if I told you? • Million dollars? • 25 Billion dollars? • 100 Billion dollars • Fiat currency = value only because we think it does
  22. 22. Why can’t we just print more money? • Quantity theory of inflation Piles of currency in Zimbabwe
  23. 23. Hyperinflation in Zimbabwe • Start of 2008 – 100 % inflation • End of 2008-2009 – 10,000,000 %!! – 10 X 6th inflation
  24. 24. What else causes inflation? • Cost push theory • Demand pull theory
  25. 25. Brainstorm 5 things a typical family would buy in a month
  26. 26. Inflation • Rise in prices over time Always a percentage, But unlike unemployment rate, • “cost of living” It can be more than 100, or • Calculate using a negative Consumer Price 1-3 % inflation = normal Index • CPI = New Prices – Old Prices Old Prices X 100
  27. 27. Who likes inflation? • • • • • • • • Retirees Consumers Lenders on fixed interest rates Borrowers on fixed interest rates Sales people Real estate agents College students Doctors
  28. 28. Sony PS3 Price change % • Gas in 2009: $2.50 • 2011: $3.20
  29. 29. Inflation calculator
  30. 30. If I buy 20 Gallons of gas per week • At $1/Gallon • At $2/Gallon • At $3/Gallon
  31. 31. Recently though
  32. 32. Calculate CPI Slovenia 2006, in Euros Housing 100 Transportation 20 Food 50 Energy 15 Medical Care 5 Apparel 10 Total: 200 Slovenia 2008, in Euros Housing 115 Transportation 25 Food 55 Energy 45 Medical Care 10 Apparel 15 Total: 265 CPI current year – CPI base year 265 SO 200 100 = 200 (2006) 32.5% INFLATIO CPI base year N=
  33. 33. You try one United States 2006, in $$$$ Housing 700 Transportation 300 Food 100 Energy 45 Medical Care 45 Apparel 100 United States 2008, in $$$$ Housing 690 Transportation 310 Food 120 Energy 90 Medical Care 45 Apparel 95 Total: 1290 Total: 1350 4. Calculate the US inflation rate 5. Is this a good rate or should we be worried? 6. What is deflation and why is it good? 7. Do you think fiat currency is better for a country than representative currency? Explain.

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