Upload
rudolph-weaver
View
214
Download
0
Embed Size (px)
Citation preview
Alomar_111_10 1
Inflation
Another economic instability problem
Alomar_111_10 2
Meaning of Inflation
Is the rise in general piece level. Not necessary that all prices are
increasing In periods of inflation, some prices are
rising while some are declining The most important: general price
level, and the increase to have an affect
Alomar_111_10 3
Measuring Inflation
Using CPI when price index measures the general level of prices in the economy.
CPI year A=(basket yearA)/(basket in base year) X100
Therefore, inflation rate2000 =CPI2000-CPI1999 X100
CPI1999
Alomar_111_10 4
Types of Inflation
1. Demand Pull Inflation: assume that the economy is at its full
capacity of production. Assume that total spending is greater
than production level… what will happen to price level?
Alomar_111_10 5
Since all resources are fully employed, production cannot respond to this increase in demand.
Therefore, outputs cannot be expanded to meet demand
This excess demand will bid up prices, causing “demand-pull inflation”.
“Too much spending for too few goods”
Alomar_111_10 6
2. Cost-Push Inflation: This is an increase in per-unit
production costs. Per-unit production cost =
Total input cost / units of outputs This will reduce profits and reduce
outputs firms willing to produce.
Alomar_111_10 7
Thus, the economy’s supply of goods and services declines and the price level rises.
Costs are pushing the price level upward
Sources: supply shocks: increase in costs or raw materials, energy inputs, wages…
Alomar_111_10 8
Redistribution Effects of Inflation
Inflation hurts some, leaves others unaffected
That is, inflation redistributes real income from some to others
Who benefits and who gets hurt?
Alomar_111_10 9
terminology
Nominal and real income:Real income =
nominal income/price index Real wage: purchasing power of
nominal wage (number of $$ received as wages, rent, interest, or profits)
Some people will be affected more than others as inflation occurs (redistribution effect)
Alomar_111_10 10
The following rule tells us approximately by how much real income will change:
%ΔReal in Income = %Δ in nominal income - %Δ in price level
Anticipation and the effect of inflation?
Alomar_111_10 11
Who is Affected by Inflation?
Unanticipated inflation hurts:1. Fixed income receivers2. Savers3. Creditors Who is Unaffected by Inflation?1. Flexible income receivers2. Debtors
Alomar_111_10 12
Anticipated Inflation
The redistribution effects of inflation are less sever or can be eliminated when people can expect inflation and can adjust their nominal incomes to reflect the expected price-level increases.
Save more now (consume less)
Alomar_111_10 13
Hyperinflation
Is an extremely high rate of inflation. Agents expect inflation rate to even
gets higher, leading them to “spend now”.
May cause economic collapse Uncertainty about future prices