Mod. 33 Vocab Classical model of price level: real quantity of money is ALWAYS at its long run equilibrium Increase in the money supply of 10% the aggregate price level immediately and automatically increases 10% Inflation Tax: a reduction in the value of the money held by the public caused by inflation Hyperinflation: a situation where the price level increase is so out of control that the concept of inflation is meaningless Demand-pull inflation: inflation caused by an increase in AD Cost-push inflation: inflation caused by a significant increase in the price of an input with economy-wide importance

Hyperinflation—Module 33 HW: Budget Challenge Mod. 34 Notes—Friday Hyperinflation—Module 33 C-7 Students will state the consequences of Conestoga’s athletic apartment increasing prices of tickets on aggregate price level on the economy.

Freshman Basketball Tickets and Hyperinflation Demonstration Is this an example of an inflation tax? YES!!! By devaluing the real purchasing power of a dollar in an effort to cover a budget deficit!

Printing Money to Raise Revenue 2010 the United States: the monetary base (reserves + currency in circulation) was $559 billion greater than it had been a year prior! Process known as Seignorage…

Seignorage The Treasury and the FED working together to generate revenue to chip away at budget deficits Treasury issues bonds to the private sector FED monetizes the debt by printing money to buy them back from the public in it’s Open Market Operations Treasury then pays interest on the T-bill to its new owner, the FED Essentially the FED has printed money, or created out of thin air in our digital age, to buy bonds and make money on the interest Increase in the MS causing an increase in aggregate price level Seignorage: medieval term describing the legal right to generate revenue from the printing of money…roots as far back as 16th century feudal states, to Civil War, and even today!

Freshman Basketball Tickets and Hyperinflation Demonstration The spiral of hyperinflation…once PL increases high enough People holds smaller amounts of money (MD) (real purchasing power decrease) People are better off getting rid of real $ and using to hold assets that will maintain their real values (stocks & bonds) 2. Gov’t responds by increasing the growth of the money supply to try and cover their real deficit Causes even higher inflation 3. People will again decrease real money holdings as their $ becomes less valuable 4. Gov’t, again must increase the money supply to cover real deficit Quite a nasty cycle to fall into…plenty of historical examples to look at

Identify & create a scenario for each type of inflation: 1. In order to boost political popularity, a presidential nominee promises to cut taxes in their first term as president. Cost-push or demand pull 2. The price of oil in the aggregate economy skyrockets to $150 per barrel. Cost-push or demand-pull? 3. Demand-pull scenario? 4. Cost-push scenario?