1. Money and Banking Inflation l definition l Milton Friedman’s concept l causes and measures

2. Money and Banking Inflation - increase in the general price level. This means that if... l pianos become more expensive, this is not inflation. l pianos, food, housing, computers, furniture, gas, etc. become more expensive, this is inflation.

3. Money and Banking Inflation is also... a persistent decline in the purchasing power of money. This means that... if a year ago you could buy 10 candies with $1, and there is inflation, now you can buy less than 10!

4. Money and Banking Milton Friedman “Inflation is always and everywhere a monetary phenomenon.” The quote of the day

5. Money and Banking A little biography: Milton Friedman l American economist and a leading spokesman for the monetarist school of economics. l A staunch conservative and opponent of the beliefs of J.M. Keynes, Friedman developed the theory that changes in monetary supply precede, rather than follow, changes in overall economic activity. l Born in Brooklyn, N.Y. in 1912. A professor at the University of Chicago (1946-82). l Received the 1976 Nobel Prize in economics. l His writings include Capitalism and Freedom (1962).

6. Money and Banking What explains inflation? l The price level (PL) and the money supply (MS) generally move closely together. l A continuing increase in the MS might be an important factor in causing increase in the PL, known as inflation. Source: Economic Report to the President

7. Money and Banking Further Evidence l The countries with the highest inflation are also the ones with the highest money growth rates. l Inflation may be tied to continuous increases in the MS. l There is a positive assosiation between inflation and the growth rate of the MS. Average Inflation Rate versus Average Rate of Money Growth in Selected Countries, 1983-1993 Source: International Financial Statistics

8. Money and Banking Two important conclusions!!! l Milton Friedman was right. Inflatoin is always and everywhere a monetary phenomenon. l This is a good reason to study money, since its rate of growth is a driving force behind inflation.

9. Money and Banking Our next step... To understand inflation fully we need to look at money’s role at creation inflation by studying the relationship between changes in the quantity of money and changes in the PL. The End.