Economics for Leaders Money & Inflation

Economics for Leaders Butterfingers

Economics for Leaders Inflation A general, sustained increase in the price level Or A decline in purchasing power

Economics for Leaders How is Inflation measured? Market basket of goods and services compared over time Consumer Price Index

Economics for Leaders Same Products – Higher Prices

Economics for Leaders Inflation What’s the problem? Price Stability! Certainty vs. Uncertainty

Economics for Leaders Which would you rather have?

Economics for Leaders Hyperinflation in Zimbabwe A Zimbabwean friend who runs a business recently told me, “If you don’t get a bill collected in 48 hours, it isn’t worth collecting, because it is worthless. Whenever we get money, we must immediately spend it, just go and buy what we can. Our pension was destroyed ages ago. None of us have any savings left.” “Dying Silently in Zimbabwe,” by Michael Gerson, Washington Post, Feb 20, 2008

Economics for Leaders HARARE, April 25,2006 — How bad is inflation in Zimbabwe? Well, consider this: at a supermarket near the center of this tatterdemalion capital, toilet paper costs $417. No, not per roll. Four hundred seventeen Zimbabwean dollars is the value of a single two- ply sheet. A roll costs $145,750 — in American currency, about 69 cents. The price of toilet paper, like everything else here, soars almost daily, spawning jokes about an impending better use for Zimbabwe's $500 bill, now the smallest in circulation.

Economics for Leaders Lunch for 8 people costs a diner 6 million Zimbabwean dollars (about $18 U.S.)

Economics for Leaders What Causes Inflation ? All periods of significant sustained inflation have been accompanied by increases in the money supply

Economics for Leaders Money Supply (M1) Coin + Currency23% Checkable Deposits77%

Economics for Leaders Creation of Money

Economics for Leaders Federal Reserve System (FED) 12 Districts Member banks District chairpersons and boards Federal Reserve Chairman and board Open Market committee

Economics for Leaders Federal Reserve System

Economics for Leaders Manage the Money Supply to Avoid Inflation: The Job of the Federal Reserve System “All periods of significant sustained inflation have been accompanied by increases in the money supply.”

Economics for Leaders Tools of the FED Reserve requirement Discount rate Open market operations

Economics for Leaders Money Supply and Interest Rates Demanders + Suppliers = Price

Economics for Leaders Interest Rate=Price of Money Prices (and interest rates) are set by the market—not by the FED. Producers influence price through the quantity of goods. The FED influences interest rates (the price of money) through the quantity of money.

Economics for Leaders Who is watching over the Economy? What will the future hold?

Economics for Leaders Who is watching over the Economy? What will the future hold?