Macroeconomics S S E d 7

Jon Felix Nator BSEd 2 Social Studies

Inflation P t. 4 S S E d 7 M acroeconom ics

A Review the concept inflation and its related topics;

B Distinguish the 4 main causes of inflation;

C Recognize the effects of inflation, and its gainers and losers;

D Identify the measures to curb inflation.

Inflation P t. 4 S S E d 7 M acroeconom ics

1 A review of the concept of inflation and its related topics;

2 A discussion identifying the 4 main causes of inflation;

3 A discussion on the effects of inflation, and its gainers and losers;

4 A discussion on the measures to curb inflation.

A Inflation P t. 4 S S E d 7 M acroeconom ics
P a rt A : R e v ie w In fla tio n P t. 4 S S E d 7 M a cro e co n o m ics

(P unongbayan, 2 0 1 8 )

Ang inflation ay ang porsyentong pagbabago ng

consumer price index (CPI) sa loob ng isang taon.

Sinusubukan ng C P I na sukatin ang presyo ng

maraming produkto at serbisyo sa isang ekonomiya.
 F igure 1

P a rt A : R e v ie w In fla tio n P t. 4 S S E d 7 M a cro e co n o m ics

Mga produkto at serbisyo na kalimitang

binibili ng ordinaryong Pilipinong consumer,
tulad ng pagkain, damit, renta sa bahay,
bayad sa kuryente, tuition, atbp.
(P u n o n g b a ya n , 2 0 1 8 )
 Sa loob ng mahahabang panahon — tulad ng
maraming dekada o siglo — ang inflation ay
katuwang ng paglago ng ekonomiya.

May masamang dulot ang deflation, o ang

pagbaba (imbis na pagtaas) ng mga presyo ng
bilihin.

Bagamat okay ang inflation sa mahahabang

panahon, hindi ito maganda pag masyadong
(P u n o n g b a ya n , 2 0 1 8 ) mabilis.
P art A : R eview Inflation P t. 4 S S E d 7 M acroeconom ics
F igure 32

Kapag ito ay masyadong mabilis, o labis sa target ng gobyerno.

P a rt A : R e v ie w In fla tio n P t. 4 S S E d 7 M a cro e co n o m ics
P a rt A : R e v ie w In fla tio n P t. 4 S S E d 7 M a cro e co n o m ics
J.F .N . (2020)
B Inflation P t. 4 S S E d 7 M acroeconom ics
P a rt B : C a u s e s In fla tio n P t. 4 S S E d 7 M a cro e co n o m ics

2
F igure 4 Cost-push

(R o b e rt J. G o rd o n , 1 9 8 8 )

Shows the 3 major types of inflation

in Keynesian economic theory

1 3
Demand-pull Built-in
 1

Occurs when demand for goods across an

economy exceeds the supply. Described as “too
much money chasing too few goods."

Occurs when:
Unemployment is low

Wages are high

F igure 5
Taxes are low
(In ve sto p e d ia , 2 0 1 9 ) Aggregate Demand (AD) continuously rises faster than Aggregate Supply (AS)
 1

Occurs when demand for goods across an

economy exceeds the supply. Described as “too
“
As demand for a particular good or service
increases, the available supply decreases.
much money chasing too few goods."
When fewer items are available,
Occurs when:
consumers are willing to pay more to
Unemployment is low
obtain the item—as outlined in the
Wages are high “
economic principle of supply and demand.
Taxes are low
(In ve sto p e d ia , 2 0 1 9 )
 2

Occurs when prices increase due to increases

in production costs, such as raw materials and
wages.

The added costs of production are passed

onto consumers in the form of higher prices
for the finished goods. (In ve sto p e d ia , 2 0 1 9 ) F igure 6

Short-run Aggregate Supply (SRAS) rises without an increase in Aggregate

Includes: Oil, farm produce, metals, chemicals, wages Demand (AD). This is “supply shock”.
 2
Caused by:
Occurs when prices increase due to increases
in production costs, such as raw materials and Higher wages

wages. Rise in prices of raw materials

The added costs of production are passed Rising import prices

onto consumers in the form of higher prices
Higher taxes for domestic and imported capitals
for the finished goods. (In ve sto p e d ia , 2 0 1 9 )
Natural disasters

Includes: Oil, farm produce, metals, chemicals, wages

 3

Induced by adaptive expectations Inflation occurs

Laborers demand
It involves workers trying to keep their wages higher wages
up with prices (above the rate of inflation),
and firms passing these higher labor costs
Firms raise prices
on to their customers as higher prices, to compensate
leading to a feedback loop. F igure 7

(In ve sto p e d ia , 2 0 1 9 ) Expectation of inflation drives actual inflation.

 1
2
When aggregate demand (AD)
is greater than aggregate 3
supply (AS) Inflation caused by increases
in production costs, such as
raw materials and wages
Feedback loop between rising
wages and higher prices

(R o b e rt J. G o rd o n , 1 9 8 8 )

P a rt B : C a u s e s In fla tio n P t. 4 S S E d 7 M a cro e co n o m ics

P a rt B : C a u s e s In fla tio n P t. 4 S S E d 7 M a cro e co n o m ics F igure 7

Quantity Theory of Money

F rie d m a n & S ch w a rtz (1 9 6 3 ), M o n e ta ry e co n o m ic th e o ry

The money supply has a direct, proportional

relationship with the price level.

So if, for example, the currency in circulation

increased, there would be a proportional
increase in the price of goods to catch up with
the status quo. (L u m e n L e a rn in g , n .d .) Over time the money supply has had a direct relationship to the level of inflation.
P a rt B : C a u s e s In fla tio n P t. 4 S S E d 7 M a cro e co n o m ics F igure 8

Gov’t prints too much money

(currency inflation)
Quantity Theory of Money
F rie d m a n & S ch w a rtz (1 9 6 3 ), M o n e ta ry e co n o m ic th e o ry

Too much capital chases too

few goods
The money supply has a direct, proportional
relationship with the price level.

So if, for example, the currency in circulation

Cost-push or demand-pull is
increased, there would be a proportional triggered
increase in the price of goods to catch up with
the status quo. (L u m e n L e a rn in g , n .d .) This explains why the government cannot simply print more money to make itself wealthier.
C Inflation P t. 4 S S E d 7 M acroeconom ics
1 Erodes purchasing power
Merely a rephrasing of its definition; Inflation is a
decrease in the purchasing power of currency due
to a rise in prices across the economy.

2 Causes more inflation

The urge to spend and invest in the face of inflation
tends to boost inflation in turn, creating a
potentially catastrophic feedback loop.
(In ve sto p e d ia , 2 0 1 9 )
1 Encourages spending, investing
Because of inflation, money becomes worth less
over time, which makes it attractive to spend and
invest instead of hold on to what you have.

2 Reduces unemployment
Inflation-induced rise in prices spur more people to
work. Increased spending and higher profits also
mean that employers can hire more workers.

3 Boosts short-term economic growth

Inflation gives consumers and businesses an
incentive to spend and invest, allowing for (In ve sto p e d ia , 2 0 1 9 )
economic growth.
4 Good for debtors
The initial amount of money they borrowed would
have been more valuable compared to the amount
they have to return; Inflation reduces debt by
devaluing purchasing power of the principal
amount.

5 Combats deflation
Deflation is the opposite of inflation, and it can
drags an economy into recession or depression as
economic activity grinds to a halt.
(In ve sto p e d ia , 2 0 1 9 )
1 Extreme: Destabilizes economy
Extreme cases of inflation leads to insecurity, loss
of wealth and, in extreme cases, bank runs, which
can be detrimental to an economy.

2 Extreme: Raises borrowing cost

During high inflation, Central banks raise interest
rates to encourage depositing and discourage
borrowing, and thus reduce the money in
circulation.

3 Extreme: Social Unrest & Revolt

Inflation can lead to massive demonstrations and (In ve sto p e d ia , 2 0 1 9 )
revolutions, like in Tunisia and Egypt in 2011.
4 Extreme: Hoarding
People buy durable and/or non-perishable
commodities as stores of wealth, to avoid the
losses expected from the declining purchasing
power of money, creating shortages of the hoarded
goods.

5 Bad for creditors

Because the fixed amount of principal and interest
they lent out would now be valued less.

6 Weakens currency
If a country has high inflation for a long time, its (In ve sto p e d ia , 2 0 1 9 )
exports less price competitive in world markets.
D Inflation P t. 4 S S E d 7 M acroeconom ics
In most countries, central banks or other monetary authorities are tasked with keeping their
interbank lending rates at low stable levels, and the target inflation rate of about 2% to 3%. (H u m m e l, 2 0 0 7 )

1
The central bank introducing a period of higher interest rates to reduce consumer and investment
spending and to attract saving. As the money supply decreases, so does the rate of inflation.

2
A higher rate of income tax, which could reduce spending, demand and inflationary pressures. The gov’t
also reducing its own spending on public and merit goods or welfare payments.
P a rt C : E ffe c ts In fla tio n P t. 4 S S E d 7 M a cro e co n o m ics
 P a rt C : E ffe c ts In fla tio n P t. 4 S S E d 7 M a cro e co n o m ics

3
Supply side policies seek to increase productivity, competition and innovation – all of which can maintain
lower prices. Policies might include gov’t tax relief for business investment, and state funding for sectors
such as transport, energy and power supply, telecoms and health care.

4
Monetarists argue there is a close link between the money supply and inflation, therefore controlling
money supply can control inflation.

To restore price stability, governments/central banks need to pursue deflationary fiscal/monetary policy. However,
this leads to lower aggregate demand and often a recession. So once inflation is curbed, reflation is employed.
Flash test: True or False
1. The percentile change in price of the CPI
within a year is called inflation.
2. The basket of goods is composed of
commodities that are often purchased by
the consumers.
3. Inflation is purely bad.
4. Inflation is good when it is fast or when it
exceeds gov’t targets.
5. Cost-push inflation is caused by an
increase in spending power.
6. Demand-pull inflation is caused by price
increases for capital/production goods.
7. The quantity of money supply in circulation
has no bearing on inflation.
8. Inflation can cause more inflation.
9. Inflation is the decrease in the purchasing
power of money due to rising prices.
10. Inflation is good for creditors, and bad for
loaners.
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(2019). Inflation. Investopedia. Retrieved January 25, 2020 from https://www.investopedia.com/ask/answers/111314/what-causes-inflation-and-does-anyone-gain-it.asp

(n.d.) Defining, Measuring, and Assessing Inflation. LumenLearning. Retrieved January 27, 2020 on https://courses.lumenlearning.com/boundless-economics/chapter/defining-measuring-and-assessing-inflation/

(n.d.) What Causes Inflation and Who Profits From It? Investopedia. Retrieved January 23, 2020 from https://www.investopedia.com/ask/answers/111314/what-causes-inflation-and-does-anyone-gain-it.asp
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Riley, G. (n.d.) Policies to Control Inflation. Tutor2U. Retrieved January 27, 2020 from https://www.tutor2u.net/economics/reference/policies-to-control-inflation