#14.02 -- Inflation and Deflation (8.25)

Views:
 
Category: Education
     
 

Presentation Description

No description available.

Comments

Presentation Transcript

PowerPoint Presentation:

Video #14.02 Inflation and Deflation

Inflation and Deflation:

Inflation and Deflation Chapter Learning Outcomes Describe the impact of changes in the money supply on the inflation rate. Distinguish between nominal and real interest rates in regards to inflation. Describe the negative effects of high rates of inflation. Describe the negative effects of deflation.

Nominal, Real, and Expected Interest Rates:

Nominal, Real, and Expected Interest Rates Nominal interest rate: The interest rate actually charged (or paid) in the market; the market interest rate. Real interest rate: The interest rate after adjusting for inflation. Nominal interest rate = Real interest rate + Expected inflation rate.

Costs of Inflation:

Costs of Inflation There are a number of problems associated with high rates of inflation for economies: Menu Costs Shoeleather Costs Redistribution of Wealth Money Illusion Price Confusion

Costs of Inflation:

Costs of Inflation Menu Costs: Physically changing prices, on items like menus, takes time and costs money.

Costs of Inflation:

Costs of Inflation Shoeleather Costs: At high inflation rates, people try to avoid holding money, and resources are wasted as people change their behavior to avoid holding money. They make many trips to the bank and wear out their shoes.

Costs of Inflation:

Costs of Inflation Redistribution of wealth: Unexpected inflation shifts wealth from lenders to borrowers. At high rates of inflation, borrowers actually pay back less than they borrowed in real value.

Costs of Inflation:

Costs of Inflation Money Illusion: With uneven inflation, people are unable to distinguish between the nominal value of money and its real value.

Costs of Inflation:

Costs of Inflation Price Confusion: One function of money is to provide a signal for consumers and businesses, but inflation distorts this signal and confuses both consumers and businesses.

Costs of Deflation:

Costs of Deflation Deflations also causes many problems for economies: Menu Costs Redistribution of Wealth Reduced Consumer Spending Higher Unemployment Ineffective Monetary Policy

Costs of Deflation:

Costs of Deflation Menu Costs: Physically changing prices, on items like menus, takes time and costs money, both for inflation and deflation.

Costs of Deflation:

Costs of Deflation Redistribution of wealth: Unexpected deflation shifts wealth from borrowers to lenders. Deflation makes it much harder for borrowers to repay their debt, and they end up paying a higher cost for their debt, which also leads to higher debt default.

Costs of Deflation:

Costs of Deflation Reduced Consumer Spending: If consumers expect prices to fall, especially for nonessential items, consumers will delay their purchases which will reduce aggregate demand.

Costs of Deflation:

Costs of Deflation Higher Unemployment: During times of deflation, businesses need to cut costs, but “sticky wages” may prevent wages from falling which may lead to cuts in the labor force.

Costs of Deflation:

Costs of Deflation Ineffective Monetary Policy: One tool the Fed uses to improve the economy is to reduce interest rates, but the Fed is unable to use that tool during times of deflation.

Inflation and Deflation:

Inflation and Deflation Chapter Learning Outcomes Describe the impact of changes in the money supply on the inflation rate. Distinguish between nominal and real interest rates in regards to inflation. Describe the negative effects of high rates of inflation. Describe the negative effects of deflation.

authorStream Live Help