Professional Documents
Culture Documents
2nd edition
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PowerPoint by Beth Ingram
University of Iowa Copyright © 2005 John Wiley & Sons, Inc. All rights reserved.
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Key Concepts
Inflation
Inflation rate.
Inlation rate on various prices- WPI, CPI.
Causes of Inflation.
Types of Inlation based on rates.
Impact of Inflation.
Control measures.
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Inflation Rate
The rate of change in the price level
P(1) – P(0)
Rate of Inflation =
P(0)
4
Measuring Inflation
Consumer Price Index (CPI)
Producers’ Price Index (PPI)
GDP Deflator
Ratio of Nominal GDP to Real GDP
Mis-measurement issues
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Excluded
Services.
Real Estate.
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Different weights
Primary artcles – 22.02%.
Fuel power light and lubricants – 14.2%.
Manufactured products – 63.75%.
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25 USA
France
20
Germany
15
Italy
10 Japan
5 UK
0
-5
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
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Moderate Inflation
a. creeping inflation ( less than 10 % per
annum).
Running Inflation
Galloping Inflation
Hyper
Headline Inflation
Weekly inflation data reported in newspapers.
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Core Inflation
Core inflation is a measure of inflation which
excludes certain items that face volatile price
movements e.g. food products and energy.
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Money Neutrality
Price level is a yardstick
Does it matter which unit we use?
Double all prices and incomes
Is your welfare the same, better, or worse?
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Costs of Inflation
Nominal contracts
Tax systems
Mortgages
Menu costs
Transactions costs associated with changing
prices
Effect of changes in pricing technology (bar
codes)
Relative price issues
Effect on long-run growth
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Money
Why a currency?
Role of money
Store of value
Medium of exchange
Unit of account
Kinds of money
Commodity Money
Backed currency
Fiat Currency
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10000
8000
6000
M3
4000
M2
2000
M1
0
1
Money Multiplier
Vault Accumulation
$10 $19 $26.10 … $100
Total Money
Base Currency M1
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Seignorage
How does it work?
Direct – print money
Indirect – print money, buy and hold
government debt
Inflation Tax
Decline in value of cash holdings due to
inflation
Same as seignorage if inflation rate = growth
rate in currency
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Seignorage
Hyperinflation
High and persistent rate of inflation
Relationship to fiscal policy
Finance government.
spending via inflation
tax
Rising Inflation
Declining value of Money
People decrease
money holdings by
buying goods
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Quantity Theory
MV = PY
Velocity: the circulation rate of money
Growth in
Seignorage Money Inflation
Supply
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8
1970s
1910s
6 1940s
1980s
Inflation %
4
1960s
1990s 1950s
2 1900s
0
1890s
1930s 1880s
-2 1920s 1870s
-4
0 2 4 6 8 10 12
Money Supply Grow th (%)
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Summary
Inflation
Measures
Costs
Deflation
Money
Definitions
Multiplier
Seignorage and Inflation Tax
Hyperinflation
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