1. Module Types of Inflation, Disinflation, and Deflation KRUGMAN'S MACROECONOMICS for AP* 33 Margaret Ray and David Anderson

2. What you will learn in this Module : The classical model of the price level Why efforts to collect an inflation tax by printing money can lead to high rates of inflation and even hyperinflation The types of inflation: cost-push and demand-pull

3. The Classical Model of Money and Prices The Classical Model of Money and Prices %∆ M = %∆ PL Classical Model of the Price Level (E to E’’)...Good assumption given high inflation Classical Model ignores short-run changes ( E to E’)... Poor assumption given low inflation.

4. The Inflation Tax The Inflation Tax Independent central banks issue fiat money Monetizing the debt Seignorage (government’s right to print money) Inflation Tax

5. The Logic of Hyperinflation The Logic of Hyperinflation Impact of inflation tax on people’s decision to hold money Why print large sums of money? Taxi analogy (effect of raising taxes on taxi rides?) Substituting commodities for currency

6. Moderate Inflation and Disinflation Cost-push inflation (caused by a decrease in SRAS) Demand-pull inflation (caused by an increase in AD) Politically motivated inflation Disinflation? (A slowing in the rate of price inflation) Former Federal Reserve Chairman, Alan Greenspan

7. The Output Gap and the Unemployment Rate Output Gap Actual Output = Potential Output.: Actual Unemployment = Natural Rate of Unemployment Actual Output > Potential Output.: Actual Unemployment < Natural Rate of Unemployment Actual Output Natural Rate of Unemployment

8. Figure 33.1 The Classical Model of the Price Level Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

9. Figure 33.2 Money Supply Growth and Inflation in Zimbabwe Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

10. Unnumbered Figure 33.1 Zimbabwe’s Inflation Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

11. Figure 33.3 Cyclical Unemployment and the Output Gap Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers