1. Lectures in Macroeconomics- Charles W. Upton Optimal Inflation

2. The Optimal Inflation Rate The private cost of holding money is r N Economic Efficiency requires setting PC=SC.

3. Optimal Inflation The Optimal Inflation Rate The private cost of holding money is r N Economic Efficiency requires setting PC=SC. SC = 0

4. Optimal Inflation The Optimal Inflation Rate

5. Optimal Inflation The Optimal Inflation Rate

6. Optimal Inflation The Optimal Inflation Rate

7. Optimal Inflation The Optimal Inflation Rate

8. Optimal Inflation The Optimal Inflation Rate

9. Optimal Inflation Conclusion A 1% inflation rate costs  $250 million Concentrate on price stability

10. Optimal Inflation Uncertainty Costs Suppose next year's inflation rate is equally likely to be three, six, or nine percent.

11. Optimal Inflation Production The CEO of Acme Widgets must price the product a year in advance.

12. Optimal Inflation Production If the inflation rate turns out to be exactly six percent, the right price would be $1.00 each.  P $1

13. Optimal Inflation Production If the inflation rate turns out to be 3%, he will have overpriced.  P $1

14. Optimal Inflation Production If the inflation rate turns out to be 9%, he will have under priced.  P $1

15. Optimal Inflation Production If the inflation rate turns out to be exactly six percent, the right price would be $1.00 each. If the inflation rate turns out to be nine percent, widgets would be priced 3% too low. He will sell more, but make less money. If the inflation rate turns out to be only three percent, widgets will be priced 3% too high and both demand and profits will suffer. If the uncertainty can be ended, Acme can make more money. At 3%,  =$70 At 6%,  = $100 At 9%,  = $70

16. Optimal Inflation Production If the inflation rate turns out to be exactly six percent, the right price would be $1.00 each. If the inflation rate turns out to be nine percent, widgets would be priced 3% too low. He will sell more, but make less money. If the inflation rate turns out to be only three percent, widgets will be priced 3% too high and both demand and profits will suffer. At 3%,  = $70 At 6%,  = $100 At 9%,  = $70

17. Optimal Inflation Production If the inflation rate turns out to be exactly six percent, the right price would be $1.00 each. If the inflation rate turns out to be nine percent, widgets would be priced 3% too low. He will sell more, but make less money. If the inflation rate turns out to be only three percent, widgets will be priced 3% too high and both demand and profits will suffer. If no uncertainty,  =$100

18. Optimal Inflation Extra Uncertainty At 0%,  = $50 At 6%,  = $100 At 12%,  = $50

19. Optimal Inflation Extra Uncertainty At 0%,  = $50 At 6%,  = $100 At 12%,  = $50

20. Optimal Inflation Extra Uncertainty At 0%,  = $50 At 6%,  = $100 At 12%,  = $50 Moral: the greater the uncertainty, the greater the chance you have made a mistake that costs you money.

21. Optimal Inflation End ©2003 Charles W. Upton. All rights reserved