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Inflation SFLS problems
- 1. Inflation (Part 3 –consequences)
- 2. Is Inflation Goodor Bad?
- 3. 2.) CPI –measuring Inflation Inflation: 4.) Causes of Inflation 1.) Inflation Vocabulary 5.) Consequences of Inflation 3.) Problems of CPI Part 1 Part 2 Part 3
- 4. Inflation Is Inflation Goodor Bad? It’s a monster, but not everyone is hurt.
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- 6. High and volatileinflation has economic and social costs. - If people know it will happen they can protect themselves, but still has problems. Expected Inflation 5.) Consequences of Inflation Unexpected Inflation - This is the one that sucks most. - Especially when it is volatile 挥发物 it makes it very hard to conduct business. - People on fixed incomes hurt the most. - Loans that have interest rates and have inflation expectations built in are affected. - Also has the same problems as expected inflation but it’s now unexpected! Vs.
- 7. - Your moneybuys less stuff!Falling purchasing power Problems: 5.) Consequences of Inflation - Holding money as cash doesn’t have an interest rate. More trips to the bank may be necessary. Shoe leather costs Menu costs - Difficult for firms to change prices often. Taxes distorted扭曲 - Taxes usually don’t count inflation, and can cause a larger burden 负担. Inflation redistributes income - Can be unexpected and undesired!
- 8. Problems: 5.) Consequences ofInflation - Holding money as cash doesn’t have an interest rate. More trips to the bank may be necessary. Shoe leather costs The idea comes from the old days of having to walk back and forth to the bank a lot, it wore holes in your shoes. (a type of opportunity cost)
- 9. Problems: 5.) Consequences ofInflation Menu costs - Difficult for firms to change prices often. Some firms can change prices quickly. (low opportunity costs to do so.) Some firms is very costly to change their prices often. (high opportunity costs to do so.)
- 10. Problems: 5.) Consequences ofInflation Inflation redistributes income - Can be unexpected and undesired! Not always desirable, sometimes redistributes taking income from poor people and giving more income to rich people.
- 11. Overall Inflation redistributesincome arbitrarily and can be unexpected or not desired. 5.) Consequences of Inflation - Some people win – the ones getting the higher prices (think oil/gas companies) - Some people lose – the ones paying the higher prices (think YOU!)
- 12. 5.) Consequences ofInflation Inflation Winners: Debtors Many firms Inflation Losers: Government (sometimes) Lenders Some payers Most savers Inflation and uncertainty Do I spend today, or save? Prices going up or not? What is happening to my purchasing power? ARRRGGHH!
- 13. 5.) Consequences ofInflation Inflation Winners: - The ones getting the higher prices. example: - oil/gas companies Debtors - Pay back with less valuable money example: - borrow money from the bank Many firms Inflation Losers Government (sometimes) - Biggest debtor in the world (Debtors WIN!) - Can get high taxes revenue
- 14. 5.) Consequences ofInflation Inflation Winners:Inflation Losers: - The ones paying the higher prices. Falling real incomes. example: - you and me - fixed incomes Lenders - Get paid back with inflated dollars. (dollars that are worth less) example: - banks, creditors Some payers Most savers - Saving is losing value over time.
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- 16. To summarize sofar…
- 17. - a sustainedincrease in the cost of living or the general price level leading to a fall in the purchasing power of money. Inflation - is measured by the annual percentage change in consumer prices. Rate of Inflation 1.) Inflation Vocabulary - when the rate of inflation becomes negative. Deflation - the value of money becomes worthless.Hyperinflation - ………………………….hless.Stagflation
- 18. - measures thetypical consumer’s cost of living with only the typical things that are purchased. - the main way to measure inflation. Consumer Price Index (CPI) 1.) Inflation Vocabulary
- 19. How the CPIIs Calculated: - Government surveys consumers to determine what’s in the typical consumer’s “shopping basket.” 2.) CPI – measuring Inflation 1.) Fix the “basket” - Government then collects data on the prices of all the goods in the basket. 2.) Find the prices 3.) Compute the basket’s cost -Use the prices to compute the total cost of the basket.
- 20. How the CPIIs Calculated: - The CPI in any year equals: 2.) CPI – measuring Inflation 4.) Choose a base year and compute the index 100 x cost of basket in current year cost of basket in base year - The percentage change in the CPI from the preceding period: 5.) Compute the inflation rate CPI this year – CPI last year CPI last year Inflation rate x 100%=
- 21. 3.) Problems ofCPI *** The general problem is that CPI tends to overstate the actual increase in the cost of living. - Introduction of New Goods - Substitution Bias - Unmeasured Quality Change - Discount sales
- 22. Different parts ofthis theory that brings us to the conclusions we will work with: Classical Dichotomy Quantity Theory of Money Neutrality of Money Velocity of Money (V of Money) - the rate at which money changes hands. v = P x Y M Equation: Inflation and the Classical Theory
- 23. Long Run Aggregate Supply(LRAS) Price level GDP LRAS Y P1 P2Therefore: With the quantity equation (fisher equation) if V is stable that means an increase in M just means and increase in P and not Y, so in the long run we just have inflation only. M x V = P x Y Inflation and the Classical Theory
- 24. MS1 $1000 Value of Money, 1/P Price Level,P Quantity of Money 1 ¾ ½ ¼ 1 1.33 2 4 MD1 EQ price level EQ value of money A MS2 $2000 B Then the value of money falls, and P rises. Suppose the central bank increases the money supply. 2.) Money supply – demand diagram
- 25. How does thiswork? Short version: At the initial P, an increase in MS causes excess supply of money. People get rid of their excess money by spending it on g&s or by loaning it to others, who spend it. Result: increased demand for goods. But supply of goods does not increase, so prices must rise. Result from graph: Increasing MS causes P to rise. 2.) Money supply – demand diagram Quantity Theory of Money Price level GDP LRAS Y P1 P2
- 26. Price level GDP AD SRAS PE LRAS YN SRAS1 Y1 P1 The bad kind ofinflation because it involves lower output. 2.) Cost-Push Negative supply shock
- 27. 4.) Causes ofInflation 2.) Cost-Push Reasons: a.) Input costs rise - Raw material costs rise. b.) Labor costs rise - Pay more for workers means increased input costs. c.) Fall in the exchange rate - Raw materials imported costs rise. d.) Expectations of inflation - If inflation is expected, raise prices even higher.
- 28. Price level GDP AD SRAS PE LRAS YN Y1 P1 AD1 The good kindof inflation because it involves more output. 3.) Demand-Pull
- 29. 4.) Causes ofInflation 3.) Demand-Pull Reasons: a.) Growing economy - Demand rising faster then supply can keep up.i.) *wealth effect b.) Fall in the exchange rate - Demand internationally rising faster then supply can keep up. c.) Expectations of inflation - If inflation is expected, raise prices even higher.
- 30. - Your moneybuys less stuff!Falling purchasing power Problems: 5.) Consequences of Inflation - Holding money as cash doesn’t have an interest rate. More trips to the bank may be necessary. Shoe leather costs Menu costs - Difficult for firms to change prices often. Taxes distorted扭曲 - Taxes usually don’t count inflation, and can cause a larger burden 负担. Inflation redistributes income - Can be unexpected and undesired!
- 31. 5.) Consequences ofInflation Inflation Winners: Debtors Many firms Inflation Losers: Government (sometimes) Lenders Some payers Most savers Inflation and uncertainty Do I spend today, or save? Prices going up or not? What is happening to my purchasing power? ARRRGGHH!
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