1 / 6

AP Economics

AP Economics. Mr. Bernstein Module 14: Inflation: An Overview February 1 1, 2014. AP Economics Mr. Bernstein. Inflation: An Overview Objectives - Understand each of the following: The economic costs of inflation How inflation creates winners and losers

silver
Download Presentation

AP Economics

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. AP Economics Mr. Bernstein Module 14: Inflation: An Overview February 11, 2014

  2. AP EconomicsMr. Bernstein Inflation: An Overview • Objectives - Understand each of the following: • The economic costs of inflation • How inflation creates winners and losers • Why policy makers try to maintain a stable rate of inflation • The difference between real and nominal values of income, wages and interest rates • The problems of deflation and disinflation

  3. AP EconomicsMr. Bernstein Price Levels don’t matter, Relative Prices do • If the price of gas doubles, one can only drive half as much…unless income also doubles!...in this case real income was flat • The rate of change is therefore important, not the absolute value of price changes

  4. AP EconomicsMr. Bernstein Price Levels don’t matter, Relative Prices do • Inflation rate = (Price level, year 2 – Price level, year 1) / (Price level, year 1) x 100 • Costs of inflation • Shoe leather costs • Effort spent by consumers seeking lower prices or substitutes • Menu costs • Effort spent by businesses realigning pricing strategies • Unit of Account costs • Tax increases based on inflating asset values may not be matched by income increases

  5. AP EconomicsMr. Bernstein Winners and Losers from Inflation • Borrowers pay back loans in dollars with reduced purchasing power • Nominal Interest Rates = Real Interest Rates + Expected Inflation • So when inflation exceeds expectations, the borrower benefits; when inflation is below expectations, the lender benefits • Inflation can redistribute income from those that are hurt by rising prices to those who gain from rising prices

  6. AP EconomicsMr. Bernstein Inflation is Easy; Disinflation is hard • Inflation is a rise in overall price levels • Deflation is a decline in overall price levels • Disinflation is the reduction in inflation rates • Most obvious policy to bring about disinflation is Monetary Policy (reduce money supply) • Can be painful because it causes a reduction in the demand for goods and services, which in turn causes a reduction in demand for labor

More Related