Inflation: A Monetary Phenomenon Chapter 15 Page:(365-373) Heather Wrightson.

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Presentation transcript:

Inflation: A Monetary Phenomenon Chapter 15 Page:( ) Heather Wrightson

Introduction to Inflation What is inflation? Inflation rates in various countries How do you measure inflation? The GDP Deflator and the Consumer Price Index. Unanticipated Inflation vs. Anticipated Inflation

Defining Inflation Inflation- A continuing rise in the price level Deflation- A continuing fall in the price level Hyperinflation- Extremely high inflation rates

Table 15.1 Inflation Rates for Various Countries: _____________________Year_______________________________ Country Average Turkey Mexico Norway Greece Spain Malaysia UK Netherlands United States Korea Euro Zone Canada Sweden France Germany Japan

Measuring Inflation The GDP Deflator- a weighted average of the prices of all final goods and services produced in the economy. Consumer Price Index- a weighted average of the prices of goods and services purchased by a typical urban household.

Consumer Price Index CPI is the most widely cited measure of inflation in the United States. It focuses on the prices of goods and services purchased by households. Most common measure of inflation and a basis for policy making. The CPI is used to adjust the federal personal income tax system to eliminate the effects of inflation.

Problems with The CPI It is a measure for the typical urban household. It ignores all households that do not fit in this category. The CPI overstates the increase in the cost of living because it is based on a fixed market basket of goods and services. The CPI also overstates the increase in the cost of living because it does not fully account for changes in quality.

Effects of Inflation Unanticipated Inflation- Inflation that is unexpected or higher than expected. One effect of inflation is a redistribution of income and wealth– a substantial redistribution if the inflation is unanticipated. Some individuals gain and some individuals lose.

Effects on Inflation Indexing- Linking benefits to the CPI so that they increase automatically as the CPI rises. Creditor- A person to whom money is owed Debtor- A person who owes money Debtors gain from inflation while Creditors lose.

Effects On Inflation Anticipated Inflation- Inflation that is expected. The redistribution is much less dramatic. When people anticipate inflation they can take action to protect themselves. The redistribution of wealth from creditors to debtors is also less dramatic.