INFLATION What is a dollar worth? – What is purchasing power? –The value of a particular monetary unit in terms of the goods or services that can be purchased with it. US Consumer Price Index, 1913-present – –Using the info, when did inflation, disinflation, and deflation occur?

CPI What is the CPI? – is-the-consumer-price-index-cpi/ is-the-consumer-price-index-cpi/ How often is it calculated? –Usually, CPI is calculated monthly or quarterly 2

WHY DOES INFLATION OCCUR? DEMAND-PULL COST-PUSH QUANTITY THEORY

Can inflation occur only for certain goods and services and not others? Let’s take a look... 4

5 Is this showing nominal or real increases in prices? What explains the higher cost of education/med ical care?

Negative Consequences of Inflation/Deflation 6 possible negatives of inflation? greater uncertainty redistributive effects less saving damage to export competitiveness possible negatives of deflation? high levels of cyclical unemployment bankruptcies

Redistributive Effects of (Unanticipated) Inflation Redistributes between creditors and debtors (who gains/loses?) Redistribution happens when some wages/salaries increase faster than others Redistribution happens when some asset prices increase faster than others 7

ANOTHER PROBLEM WITH UNANTICIPATED INFLATION Since purchasing power is decreasing, people may spend more now. –Would this lead to more or less inflation? 8

DEFLATION The “deflationary spiral”

JAPAN & DEFLATION

FINALLY...WHY IS DEFLATION BAD? ***don’t forget--cyclical unemployment & bankruptcies*** 3 Reasons (from Paul Krugman –(demand side) - people less willing to borrow *sitting on cash becomes a positive investment *borrowers must repay in $$$ worth more than what they borrowed –(demand side) - increases real burden of debts debtors cut spending when debt rises creditors don’t increase spending by same amount –(supply side) - downward nominal wage rigidity in simple terms...wages rarely fall unless they are accompanied by mass unemployment 11