inflation n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Inflation PowerPoint Presentation
Download Presentation
Inflation

Loading in 2 Seconds...

play fullscreen
1 / 12

Inflation - PowerPoint PPT Presentation


  • 106 Views
  • Uploaded on

Price of the Most Recent Market Basket in the Particular Year. This year’s CPI – Last year’s CPI. x. x. CPI. =. =. Inflation Rate. 100. 100. Price estimate of the Market Basket in 1982-1984. Last year’s CPI. Inflation. General rise in the price level

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Inflation' - mattox


Download Now An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
inflation

Price of the Most Recent Market

Basket in the Particular Year

This year’s CPI – Last year’s CPI

x

x

CPI

=

=

Inflation

Rate

100

100

Price estimate of the Market

Basket in 1982-1984

Last year’s CPI

Inflation
  • General rise in the price level
  • Inflation reduces the “purchasing power” of money
  • Consumer Price Index (CPI)

= 2.8%

26-1

LO2

inflation1
Inflation

By the way, the rule of 70 apples to inflation as well as economic growth (or anything else).

26-2

LO2

types of inflation
Types of Inflation
  • Demand-Pull inflation
    • Excess spending relative to output
    • Central bank issues too much money
  • Cost-Push inflation
    • Due to a rise in per-unit input costs
    • Supply shocks

26-3

LO3

inflation2
Inflation
  • Difficult to distinguish inflation types
  • Types differ in sustainability
    • Demand-pull continues as long as the excess spending continues
    • Cost-push ends in a recession
  • Without knowing what’s causing inflation, it can be difficult for the Federal Reserve to correct it.

26-4

LO3

redistribution effects of inflation
Redistribution Effects of Inflation
  • Nominal income
    • Unadjusted for inflation
  • Real income
    • Nominal income adjusted for inflation

Real Income = Nominal Income

Price Index ÷ 100

Percentage

change in real income

Percentage change in nominal income

Percentage change in

price level

=

26-5

LO3

unanticipated inflation hurts
Unanticipated InflationHurts…
  • People on a fixed-income
    • Why?
  • Savers
    • Why?
  • Creditors
    • Why?

26-6

LO3

slide7
Flexible-income receivers

COLAs

Social Security recipients

Union members

Debtors

Why?

Who is unaffected (or even helped) by unanticipated inflation?

26-7

LO3

anticipated inflation
Anticipated Inflation
  • Real interest rate
    • Rates adjusted for inflation
  • Nominal interest rate
    • Rates not adjusted for inflation

26-8

LO3

anticipated inflation1
Anticipated Inflation

11%

6%

=

+

5%

Inflation

Premium

Nominal

Interest

Rate

Real

Interest

Rate

Real interest rate = Nominal interest rate – inflation rate.

26-9

LO3

does inflation affect output
Does Inflation Affect Output?
  • Cost-Push inflation
    • Reduces real output
    • Redistributes a decreased level of real income
  • Demand-Pull inflation
    • One view is that zero inflation is best
    • Another view is that mild inflation is best

26-10

LO3

costs of inflation
Costs of Inflation
  • Page 147 of your text, it doesn’t use these terms (but other AP sources do):
    • Menu costs: the cost of actually changing prices. Can be substantial if prices change rapidly.
    • Unit of Account costs: it’s difficult to know what the real value of money is (prices, wages, interest rates)
    • Shoe-leather costs: the cost of actually managing your finances to avoid getting hurt by inflation.

26-11

LO3

hyperinflation
Hyperinflation
  • Extraordinarily rapid inflation
  • Devastates an economy
  • Businesses don’t know what to charge
  • Consumers don’t know what to pay
  • Money becomes worthless

26-12

LO3