Inflation

I.Definition of inflation

A.Definition of inflation

1.Consistent increase in the general price level 2.Thus the entire basket of good represented in the CPI or GDP Deflator will be persistently affected

I. Definition of inflation A.Definition of inflation B.Definition of deflation

1.A persistent fall in the rise of prices

I.Definition of inflation II.Costs of inflation and deflation

A.Costs of inflation

1.Redistribution effects of inflation

a.Those on pensions, fixed incomes, and social welfare benefits are more vulnerable to inflation b.Even if the rate is adjusted there will still be lags c.Lenders and savers tend to lose when inflation goes up d.Borrows win

A. Costs of inflation 1.Redistribution effects of inflation 2.Negative effects on growth

a.Inflation will eventually case a rise in interest rates which will negatively impact investment and output which will, in turn, affect employment rates b.Inflation also leads to time spent comparing costs and increased menu costs

II. Costs of inflation and deflation A.Costs of inflation B.Possible breakdown of the monetary economy

1.When hyperinflation hits people will resort to a barter system because there is no confidence in the currency

II. Costs of inflation and deflation A.Costs of inflation B.Possible breakdown of the monetary economy C.Exchange rates, trade, and inflation

1.When inflation hits an economy the exchange rate changes because as prices go up the demand for exports from that country go down

II. Costs of inflation and deflation A.Costs of inflation B.Possible breakdown of the monetary economy C.Exchange rates, trade, and inflation D.Costs of deflation

1.Good or benign deflation

a.Caused by an increase in aggregate supply b.Is good because the economy is increasing productivity

D. Costs of deflation 1.Good or benign deflation 2.Bad or malignant deflation

a.Due to decrease in aggregate demand b.Households and firms do not spend or invest but rather save their money c.If HHs and Firms believe the price level will be lower later, they will hold off on expensive purchases until later

I.Definition of inflation II.Costs of inflation and deflation III.Causes of inflation

A.Cost Push

1.An increase in factor costs on a macro scale can cause prices to rise due to increased costs 2.This causes supply-side shifts

III. Causes of inflation A.Cost Push B.Demand-Pull

III. Causes of inflation A.Cost Push B.Demand-Pull C.Excess Monetary Growth