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INFLATION What is a dollar worth? –http://www.usinflationcalculator.com/http://www.usinflationcalculator.com/ What is purchasing power? –The value of a particular monetary unit in terms of the goods or services that can be purchased with it. US Consumer Price Index, 1913-present –http://www.minneapolisfed.org/community_education/teacher/calc/hist1913.cfmhttp://www.minneapolisfed.org/community_education/teacher/calc/hist1913.cfm –Using the info, when did inflation, disinflation, and deflation occur?
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CPI What is the CPI? –http://www.investopedia.com/video/play/what- is-the-consumer-price-index-cpi/http://www.investopedia.com/video/play/what- is-the-consumer-price-index-cpi/ How often is it calculated? –Usually, CPI is calculated monthly or quarterly 2
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WHY DOES INFLATION OCCUR? DEMAND-PULL COST-PUSH QUANTITY THEORY
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Can inflation occur only for certain goods and services and not others? Let’s take a look... 4
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5 Is this showing nominal or real increases in prices? What explains the higher cost of education/med ical care?
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Negative Consequences of Inflation/Deflation 6 possible negatives of inflation? greater uncertainty redistributive effects less saving damage to export competitiveness possible negatives of deflation? high levels of cyclical unemployment bankruptcies
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Redistributive Effects of (Unanticipated) Inflation Redistributes between creditors and debtors (who gains/loses?) Redistribution happens when some wages/salaries increase faster than others Redistribution happens when some asset prices increase faster than others 7
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ANOTHER PROBLEM WITH UNANTICIPATED INFLATION Since purchasing power is decreasing, people may spend more now. –Would this lead to more or less inflation? 8
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DEFLATION The “deflationary spiral”
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JAPAN & DEFLATION
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FINALLY...WHY IS DEFLATION BAD? ***don’t forget--cyclical unemployment & bankruptcies*** 3 Reasons (from Paul Krugman - http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/) http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/ –(demand side) - people less willing to borrow *sitting on cash becomes a positive investment *borrowers must repay in $$$ worth more than what they borrowed –(demand side) - increases real burden of debts debtors cut spending when debt rises creditors don’t increase spending by same amount –(supply side) - downward nominal wage rigidity in simple terms...wages rarely fall unless they are accompanied by mass unemployment 11
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