1. Types of Inflation

2. Finish Inequality for all
We will first finish Inequality for All.
Your homework will be to answer/finish answering the questions in the packet I gave you last class.

3. Demand-Pull Inflation
Definition = inflation when the aggregate demand outpaces the aggregate supply.
The demand for goods and services increases at a time when the production of said goods and services is already high.
The Real GDP expands and price levels increase
“Too much money chasing too few goods”
In the long run, wages will go up as workers are in demand & cost of living increases

4. Example
As President of the United States, in my 2020 State of the Union address, I will call for an increase in the U.S. military presence across the globe to combat terrorism
Demand-pull Cost-push
Why?
The increased military spending will increase the aggregate demand

5. Cost-push inflation
Definition = inflation caused by an increase in the input prices (labor, raw materials, etc.) which leads to a decrease in the aggregate supply
Businesses must raise prices to make profits
This can be caused by supply shocks
An event where raw materials, energy costs, or services suddenly spike in supply

6. Example
Saddam Hussein ignited Kuwaiti oil fields and burned them for almost a year. The result was a rise in crude oil prices rose to $20-$30 a barrel.
Demand-pull Cost-push
Why?
The increased energy costs decreased the AS

7. Stagflation
Definition = when the economy experiences high inflation and high unemployment at the same time
Example = UK, 1960s-1970s
November 17th, 1965 = Iain Macleod, spokesman on economic issues for the UK Conservative Party, told the House of Commons “We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of "stagflation" situation. And history, in modern terms, is indeed being made."

8. Why does this happen?
Supply shock + inappropriate macroeconomic policies
The supply shock = raises prices but slows down the economy by making production more costly and less profitable
The policy = a central bank causing inflation by permitting the excessive growth of the money supply OR a government excessively regulates the goods and labor market
In the UK example, huge rise in oil prices and central banks used excessively stimulating monetary policies

9. Mr. Clifford!
Mr. Clifford!
Mr. Clifford - Back to the Future