1. CHAPTER 33 Inflation, Disinflation, and Deflation PowerPoint® Slides by Can Erbil © 2005 Worth Publishers, all rights reserved

2. 2 What you will learn in this chapter: Why efforts to collect an inflation tax by printing money can lead to high rates of inflation How high inflation can spiral into hyperinflation as the public tries to avoid paying the inflation tax The economy-wide costs of inflation and disinflation, and the debate over the optimal rate of inflation Why even moderate levels of inflation can be hard to end Why deflation is a problem for economic policy

3. 3 Money and Prices According to the classical model of the price level, the real quantity of money is always at its long-run equilibrium level.

4. 4 Money Supply Growth and Inflation in Brazil

5. 5 The Inflation Tax and Hyperinflation  The inflation tax is the reduction in the real value of money held by the public caused by inflation, equal to the inflation rate times the money supply, on those who hold money.  The real value of resources captured by the government is reflected by the real inflation tax, the inflation rate times the real money supply.  A vicious circle of a shrinking real money supply and a rising rate of inflation, leads to hyperinflation and a fiscal crisis.

6. 6 Money and Prices in Brazil, 1985–1995

7. 7 The Fisher Effect

8. 8 The Costs of Inflation  Shoe-leather costs  Menu costs  Unit-of-account costs

9. 9 Inflation and Nominal Interest Rates in the U.S.

10. 10 The Great Disinflation of the 1980s

11. 11 Effects of Deflation Effects of Unexpected Deflation: - Debt deflation Effects of Expected Deflation: - Zero bound - Liquidity trap

12. 12 Japan’s Trap

13. 13 The End of Chapter 33 coming attraction: Chapter 35: The Making of Modern Macroeconomics