Module 33
Types of
Inflation, Disinflation,
and Deflation
KRUGMAN'S
MACROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• The classical model of the price level
• Why efforts to collect an inflation tax by
printing money can lead to high rates of
inflation and even hyperinflation
• The types of inflation: cost-push and
demand-pull
The Classical Model of Money
and Prices
• %∆ M = %∆ PL
• Classical Model of the
Price Level (E to
E’’)...Good assumption
given high inflation
•Classical Model ignores
short-run changes ( E to
E’)... Poor assumption
given low inflation.
The Inflation Tax
•Independent central banks issue fiat money
•Monetizing the debt
•Seignorage
•Inflation Tax
The Logic of Hyperinflation
•Impact of inflation tax on people’s
decision to hold money
•Why print large sums of money?
•Taxi analogy
•Substituting commodities for
currency
Moderate Inflation and
Disinflation
• Cost-push inflation
• Demand-pull inflation
• Politically motivated
inflation
• Disinflation?
Former Federal Reserve Chairman, Alan
Greenspan
The Output Gap and the
Unemployment Rate
•Output Gap
•Actual Output = Potential Output .:
Actual Unemployment = Natural
Rate of Unemployment
•Actual Output > Potential Output .:
Actual Unemployment < Natural
Rate of Unemployment
•Actual Output < Potential Output .:
Actual Unemployment > Natural
Rate of Unemployment