Transcript Inflation
Inflation THE THIRD METRIC OF MACROECONOMIC PERFORMANCE Inflation Definition of inflation: An imbalance between the demand and the supply can cause prices to ________ Hyperinflation Germany, 1923 Former USSR, 1989 Zimbabwe video: https://www.youtube.com/watch?v=mM3_z2RB3YU Relative vs. Average Prices Inflation is a increase in ______, not a change in ________ Average price: Relative price: Difference between relative and average price: Deflation: In a reasonably stable economy, _________ Redistribution Are all people equally affected by inflation? Inflation can function like a ______, because it ______________ Nominal Income vs. Real Income Two basic tenets of inflation: Not _________________ Not _________________ THE PRICE INCREASES ASSOCIATED WITH INFLATION REDISTRIBUTE REAL INCOME Price Effects of Inflation Not all prices rise at the same rate Those who purchase goods whose prices are rising slower than than average price have real incomes that are rising Those who buy goods whose prices are rising faster than the rate of inflation Inflation Redistributes real income Note: WHILE INFLATION REDISTRIBUTES REAL INCOME, THERE IS NO WAY TO ENSURE THAT IT DOES SO IN A WAY THAT BENEFITS SOCIETY. Income Effects of Inflation Price for a buyer = income for a seller If prices are rising on average, incomes are also rising on average Producers of goods whose prices are rising at above average rates experience incomes rising at above average rates This unequal change in incomes is a redistribution of wealth Wealth Effects of Inflation Accumulated wealth declines in real value when inflation is occurring Saving are declining in real value Debt is declining in real value See Chart on pg 227 Measuring Inflation ______ ______ _______ (CPI) Definition: Compared to a baseline year US: 1982-83 January 2007: Price-Stability Goal Definition of price stability: As of the Full Employment and Balanced Growth Act of 1978, price change below __% is officially considered price stability Why not 0% price change?