Types of Inflation, Disinflation, and Deflation - Section 6, Module 33

  • very high inflation bc of rapid incr in MS

    • however, most inflation has other causes

  • in the SR, incr in MS = decr in IR = incr in investment/consumer spending = incr in GDP

    • in the LR, nominal wages/sticky prices incr = GDP decre to og level

      • in the LR, changes in MS doesnt’ change rGDP, only changes equal % incr in PL

      • when PL incr, so does aggregate PL → changes in nominal money supply leads to change in aggregate PL that leaves real quantity of money unchanged = no LR effect on AD or rGDP

  • assumption when dealing w large changes in agg. PL = change happens instantaneously (SR = LR)

  • classical model of the PL = simplified model in which real money Q is always at its LR equil level

    • money is neutral in LR

    • classical model ignores SRN movement and j assumes that econ moves directly from LR1 to LR2 → RGDP doesn’t change

    • poor assumption for low inflation bc it may take some time for wokrers/firms to react to monetary expansion → changes in MS can change rGDP in SR

    • in high inflation, stickiness of SR is gone

  • govts can print money to get rid of debt

    • seigniorage = the revenues generated by the govts right to print money

    • however, printing money incr money is circulation, which causes and equally large incr in aggregate PL, causing inflation

    • inflation tax - a reduction in the value of the money held by the public by printing money to cover the govs budget deficit and creating inflation

  • high inflation = incentive to either spend quickly or get interest-bearing assets - to avoid holding money and decr burden of inflation tax

  • hyperinflation = if a govt prints enough money to pay for a # of g/s per month = incr MS = incr inflation = more money must be printed to buy the same # of g/s

    • if the desired to reduce money holdings causes people to spend faster than the govt prints money = prices incr faster than MS = govt incr rate of growth of MS even more = hyperinflation = ppl don’t want to hold money at all so then govt has to abandon inflation tax and stop printing

  • a change in aggregate PL can be caused by a decr in AS or an incr in AD

    • cost push inflation - inflation caused by an increase in input prices, shifting AS to the left

    • demand pull inflation - inflation caused by a increase in AD → shortage (D>S)

  • in the SR, policies that produce a booming econ incr inflation and policies that decr inflation depress econ

    • inflationary policies = short term political gains, but contractionary policies = short term political costs

      • sometimes countries impose inflationary taxes even when they don’t have to j for the political gains