1. Unit 5 Inflation, Exchange Rates and Modern Macro
Chapter 32
Inflation, Disinflation and Deflation

2. I. Inflation Rising Prices
Inflation Tax: A reduction in the value of money held by the public caused by inflation.

3. II. Hyperinflation Extreme, rapidly rising prices (100,000%)
How does this occur?
Gov. prints large amounts of money to cover a budget deficit.
Public reduces money holdings
Gov. must print more and more to make ends meet.

7. II. Moderate Inflation and Disinflation
Cost-Push Inflation: caused by increase in prices of inputs important to economy
Decreases AS curve
Ex. OIL
Demand-Pull Inflation: increase in aggregate demand.
“too much money chasing too few goods”

8. Practice
Use a correctly labeled aggregate supply and demand graph to illustrate cost-push inflation. Give an example of what might cause cost-push inflation in the economy besides oil prices.

9. III. The Phillips Curve
Shows the tradeoff between inflation and unemployment.
Discussion: What happens to inflation and unemployment when AD increases?

15. IV. The Long Run Phillips Curve
Relationship between unemployment and inflation after expectations of inflation have adjusted.
Disinflation: the process of bringing down inflation.
Very costly, usually creates high levels of unemployment.

19. V. Liquidity Trap Interest rate is zero bound: cannot go below zero
Liquidity trap: Monetary policy cannot be used anymore because interest rates are zero bound.

22. 2011 FRQ
Handout