Q7: Inflation By Ian McCarthy and Kelvin Weymes

What is The Multiplier?• The multiplier Is the number of times an injection of

money leads to an increase in the national income.

The size of the multiplier depends on • The marginal prosperity to consume• The marginal prosperity to save • The marginal prosperity to tax • The marginal prosperity to import

Example of The Multiplier from Economic History• The Economic table of Francois Quesnay, laid the foundation of

the Physiocrat school of economics which is credited as the first precise formulation of interdependent systems in economics and the origin of multiplier theory.

• In the economic table, one sees variables in one period feeding into variables in the next period and a constant rate of flow yields geometric series, which computes a multiplier.

• The modern theory of the multiplier was developed in the 1930s, by Kahn, Keynes and Giblin.

What is Inflation?

• Inflation is the rate at which the general level of prices for goods and services is rising and subsequently purchasing power is falling.

• This occurs when demand for products and services by consumers is stronger than the supply of the desired products and services.

• Debtors gain in the short term as they can repay the load with inflated currency which is worth less.

• An inflation rate is the percentage increase in the price of goods per year.

Example of Inflation from Economic History• Zimbabwe - 2006 to 2009• Inflation reached 66,212 % in December 2007, the highest in

the world at that time.• In 2009 the Zimbabwe government issued the Z$100 trillion bill

as inflation eroded purchasing power.• Shortly after the Zimbabwean dollar was abandoned in favour

of foreign currencies.• A roll of toilet roll cost 145,750 Zimbabwe dollars

Zimbabwe Inflation

The Zimbabwean $100 trillion bill is now a novelty item

Example of other Inflation from Economic History

Highest Monthly Inflation Rates in History

Country Month with highest inflation rate

Highest monthly inflation rate

Equivalent daily inflation rate

Time required for prices to double

Hungary July 1946 1.30 x 1016% 195% 15.6 hours

Zimbabwe Mid-November 2008 (latest measurable)

79,600,000,000% 98.0% 24.7 hours

Yugoslavia January 1994 313,000,000% 64.6% 1.4 days

Germany October 1923 29,500% 20.9% 3.7 days

Greece November 1944 11,300% 17.1% 4.5 days

China May 1949 4,210% 13.4% 5.6 days

What is Deflation?

• Deflation is a decrease in the general price level often caused by a reduction in the supply of money or credit, it can also be caused by a decrease in government personal or investment spending.

• Deflation is an indication that the economic conditions deteriorating.

• It is also usually associated with unemployment.

Example of The Deflation from Economic History The Great Depression 1929-1940 • The Great Depression plunged the American people into an economic crisis unlike any endured country had seen before or since.

• It was worst and longest downturn in economic history, it threw millions of hardworking individuals into poverty and for more than a decade neither the free market nor the federal government was able to restore prosperity.

• Unemployment reached 24.1 percent in 1993 , the stock market crashed, and consumers lost much of their savings.

Six problems caused by high inflation• Rising prices causes worsening poverty as the essentials for

survival become more expensive which makes it less attainable to those with low income.

• It creates uncertainty and entrepreneurs will be reluctant to invest which will slow down potential for economic growth

• High inflation can reduce the incentive to save.

Six problems caused by high inflation• Shoe leather costs – when prices are unstable there will be an

increase in search times to discover more about prices. It increases the opportunity cost of holding money so more people make visits to their banks.

• Consumers and businesses on fixed incomes will lose out .• Menu costs – is extra costs to firms of changing price

information which can be important for companies who rely on bulky catalogues to send price information to customers.

References

• http://www.nytimes.com/2006/05/02/world/africa/02zimbabwe.html?_r=1&oref=slogin

• http://www.dallasfed.org/assets/documents/institute/annual/2011/annual11b.pdf

• http://www.economicshelps.com• http://en.wikipedia.org/wiki/Multiplier_(economics)• Rapid Revision Economics – Michael Ruane

Hyper-InflationKelvin Weymes

What is Hyperinflation?

•Extremely rapid or out of control inflation – where prices increase very fast as money loses it’s value

10,000 Mark would buy over 500,000 Mark would buy just 40 pounds of meat 250 Pounds of Meat

Germany 1922- 10,000 Mark Germany 1923- 500,000 Mark

What caused Hyperinflation in Germany ?• Conditions of the Treaty Of Versailles • Obligated to pay war reparations • 1923 Germany could not pay these reparations• Occupation of the Ruhr - France and Belgium• All out General Strike in Germany• Government did not have enough to pay workers

What did this mean for Germany?

• Had to print more money• Wages increased to keep up with prices• The more money printed, more it diluted its value• Eventually money became worthless- paper money• Wages increased• Businesses raised prices- • Wages got higher and higher

Germany 1923

Country Struggle

• People collected their wages in a wheelbarrow• Prices of food went up higher than people’s wages• Fixed incomes suffered• Wages staying the same food prices going up – • Too low to live on• Those who had savings suffered –now worthless

Who benefitted from Hyperinflation?

• Debtors- People paying back debt gained as the money was not worth the same as it once was• Foreigners who visited Germany- Small amounts of money would be able to buy a lot in the wreckage of Germany

Cost Push Inflation

• Cost Push Inflation is where the Selling Price must be increased due to the cost of making the product or service rising in price

• Raw materials, wages, taxes• Rising Prices in Irish potatoes since 2012-

• High demand for a limited supply• €2.50 - €3.00 – local chipper

• If higher tax on alcohol- Wine prices will raise

Oil Crisis 1973

In response to Yom Kippur War – OPEC Changes :

• Announced Oil Embargo• Raise in all trade prices

• Unified Block on all exports• Oil price raised by 70%

• Gave OPEC power

What did this lead to?

• Worldwide recession• Long term possibility of high oil prices• Smaller Quantities of Oil for more money• Shortage of Petrol• Heating, Electricity and Gas became an issue • Saving energy – Oregon Christmas lights ban• Unemployment/ Wage cuts– not as many people needed• Campaigns – “Don’t be Fuelish”

Evidence of Gas Shortages

Power Shortages

Alternatives

1974- Prices raised 4 times higher than they had at the start of the Oil Crisis

• New alternatives• Cheaper ways to live

• Cycling to work• Solar power energy

• Japan- Produced Cars less petrol• Moved on to electronics

Demand Pull Inflation

Definition-

• The demand for a certain product is greater than the amount of goods being supplied

• When there are high demands, prices will rise• Individuals are trying to purchase the same good, the price will

inevitably increase• The complete opposite of Cost Push Inflation

Dublin’s Property Boom

• Full employment- More money• Living like the United States• People thought boom last forever

• People borrowing 8-10 times monthly income• High demand for houses

• Houses limited• Prices rose

• Oversupply of apartments

What did this lead to?

• Continuous rising in price• Led to suburbs becoming more expensive e.g. Clontarf / Dublin 4

• Public Transport prices rising• More borrowing• Investment abroad• Government investing their own money in property –

• Urban redevelopment • Property Bubble bursting

• Debt - houses not worth what they once wereRecession

7a) Six problems caused by high inflation• Rising prices causes worsening poverty as the essentials for

survival become more expensive which makes it less attainable to those with low income.

• It creates uncertainty and entrepreneurs will be reluctant to invest which will slow down potential for economic growth

• High inflation can reduce the incentive to save.

Six problems caused by high inflation• Shoe leather costs – when prices are unstable there will be an

increase in search times to discover more about prices. It increases the opportunity cost of holding money so more people make visits to their banks.

• Consumers and businesses on fixed incomes will lose out .• Menu costs – is extra costs to firms of changing price

information which can be important for companies who rely on bulky catalogues to send price information to customers.

7b) Three ideas put forward in Keynesians Economics regarding booms and recessions and how to prevent them• Keynes predicted economic crisis in the 1930’s1. If no one is spending, no money is coming into the economy

• People were saving money• Government have to step in

• Stop raising taxes – Progressively poorer • Getting the economy flowing again

• Investing in Businesses• Creating jobs

• Employment will rise

Great Depression

• Herbert Hoover raised taxes• Made Depression worse

• Keynes thought- “In the long run we are all dead”• Start by reducing interest rates

• Increasing spending in infrastructure• Increase in employment = increase in spending• Get us back to a cycle of:

• Receiving income spending it back into the economy

What we should do in a Boom

2. According to Keynes –Booms are not good as it has to lead to Bust

• We want a more steady economy • We don’t want a big boom then a big bust

• Counter Cyclical Fiscal Policies- • Increasing taxes in booms

• Cutting back in government spending

What does this lead to?

• Tax tends to decrease demand when the economy is booming• E.g. property prices not going to an extreme in price

• Leads to people not spending as much• Prepares us for the worst • Keeps us steady• Spending enough to keep cycle going• Not going from one extreme to another• Government have money – harder for a recession to hit

• Economy is stronger

Keynes Multiplier Effect

3. If a government invests money into a business That business would then use that money to make goods and pay wagesWith the goods they make, they then sell on-They use the profits to buy the items necessary for making the product-This money is then going back into the economy and slowly increasing Creating a circular flow of income

Example

• Example – Ireland exports – Government invested a lot of money into IT Now exporting a lot of their goods which increases the multiplier effect

References – Kelvin Weymes

www.Joelscoins.comwww.Britannica.comhttp://en.wikipedia.org/wiki/Keynesian_economicshttp://www.investopedia.com/terms/d/demandpullinflation.asphttp://www.youtube.com/watch?v=WI1i5yhwOz8Less stress more successBlackboard notes

References – Ian Mccarthy

• http://www.nytimes.com/2006/05/02/world/africa/02zimbabwe.html?_r=1&oref=slogin

• http://www.dallasfed.org/assets/documents/institute/annual/2011/annual11b.pdf

• http://www.economicshelps.com• http://en.wikipedia.org/wiki/Multiplier_(economics)• Rapid Revision Economics – Michael Ruane