Standard 2 Understand the fundamental concepts relevant to the institutions, structure, and functions of a national economy SS.912.E.2.7 Identify the impact of inflation on society

Milton Friedman quotes: “Inflation is a disease, a dangerous and sometimes fatal disease, a disease that if not checked in time can destroy a society.” Inflation is “always and everywhere a monetary phenomenon” “Inflation occurs when the quantity of money rises appreciably more rapidly than output, and the more rapid the rise in the quantity of money per unit of output, the greater the rate of inflation.”

Widely held, but false, explanations for the cause of inflation: Unions Business Imports/foreign countries Low productivity Supply shocks, i.e. oil

The core “problem” with inflation is that it distorts information and thereby inaccurately changes decision-making The worst kind is unexpected inflation

Video: Ducktales inflation

Costs of inflation: Shoeleather costs- lost time and convenience of holding less currency while putting more money in the bank (presumably to accrue interest to offset inflation) Menu costs- the costs of changing prices Relative-price variability- erroneous relative prices incorrectly misallocate resources Tax distortions- higher nominal incomes push individuals into higher tax brackets Confusion and inconvenience

The end result is less productivity People spend more time trying to minimize the effects of inflation instead of producing goods and services

Video: Milton Friedman Free to Choose-inflation

I’ve also heard deflation is bad. Why?

Video: ABC News deflation

So what’s the best scenario? Low and steady inflation Fed usually targets 1.5 to 2.0% per year