Topic 6: Inflation

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Topic 6 Inflation

• Definitions
• The nature of inflation and why is a terror?

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Definitions

• Inflation is the phoneme that the general price
  level of our economy increases

P1
P0
Price Level
Real GDP
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Definitions

• Deflation is the phoneme that the general price
  level of our economy decreases

P0
Price Level
P1
Real GDP
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The measure of inflation

• The measure of inflation
• Consumer Price Index
• GDP deflator
• Inflation rate of this year
• (This year index Last year index)/Last year
  index100
• Positive rate implies inflation.
• Negative rate implies deflation.

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The nature of inflation

• The average people are not hurt if inflation is
  mild and stable
• Workers may not get hurt
• Real wage Labor productivity, (In the long run)
• Real wage Nominal wage/Price level
• ? Nominal Wage ? Real wage ? Inflation
  rate

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The nature of inflation

• Lenders and borrowers may not get hurt
• Nominal interest rate Real interest rate
  Inflation rate
• If inflation is out of expectation, someone may
  get hurt
• If inflation is under estimated,
• lenders and employees get hurt.
• If inflation is over estimated,
• borrowers and employers get hurt.

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The nature of inflation

• Real wage labor productivity holds only in the
  long run.
• Inflation erodes the purchasing power of fixed
  income
• Purchasing Power of a given sum of money is the
  volume of goods and services that it can buy
• Contracts and government benefit may not renew or
  adjust frequently.
• Rapid or volatile inflation is bad
• Video German Bolivia