Transcript Unit 2

Unit 10. Income, Consumption and
Saving. Inflation: causes and
consequences
IES Lluís de Requesens (Molins de Rei)
Batxillerat Social
Economics (CLIL) – Innovació en Llengües Estrangeres
Jordi Franch Parella
Surplus and Deficit
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Y=C+I+G
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Y – C – G = I (Total Saving = Total
Investment)
(Y – C – T) + (T – G) = I (Private Saving +
Public Saving = Total Investment)
Private Saving is the income left after
families have paid taxes and consumption
Public Saving is the revenue left after
government has paid its spending
If T > G, the government runs a budget
surplus
If G > T, the government runs a budget
deficit
Causes of Inflation
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Quantitative Theory of Money: M . V = P
. Y; where M is the money supply, V the
velocity of circulation of money, P the
overall level of prices, Y the real GDP
V tends to be stable over time
An increase in M leads to an increase in
P
Then, inflation is always and everywhere
a monetary phenomenon
Causes of Inflation
Causes of Inflation
Causes of Inflation
Consequences of Inflation
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A decrease in the purchasing power of
money
It hurts the creditors and benefits the
debtors --> arbitrary redistribution of
wealth
Unemployment
A decrease in the international
competitiveness
Incorrect allocation of resources
Consequences of Inflation
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Shoeleather costs, menu costs
Inflation increases the tax burden and
exaggerates the capital gains and the
profits --> decapitalization of firms
It hurts saving for many reasons: it hurts
creditors, the after-tax real interest rate
falls
An uncontrolled inflation can turn itself in
hyperinflation (= the death of the society)