CHAPTER 33
Inflation, Disinflation, and Deflation
PowerPoint® Slides
by Can Erbil
© 2005 Worth Publishers, all rights reserved
What you will learn in this chapter:
Why efforts to collect an inflation tax by printing money can
lead to high rates of inflation
How high inflation can spiral into hyperinflation as the public
tries to avoid paying the inflation tax
The economy-wide costs of inflation and disinflation, and the
debate over the optimal rate of inflation
Why even moderate levels of inflation can be hard to end
Why deflation is a problem for economic policy
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Money and Prices
According to the classical model of the price level, the real
quantity of money is always at its long-run equilibrium level.
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Money Supply Growth and Inflation
in Brazil
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The Inflation Tax and Hyperinflation
The inflation tax is the reduction in the real value of money
held by the public caused by inflation, equal to the inflation rate
times the money supply, on those who hold money.
The real value of resources captured by the government is
reflected by the real inflation tax, the inflation rate times the
real money supply.
A vicious circle of a shrinking real money supply and a rising
rate of inflation, leads to hyperinflation and a fiscal crisis.
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Money and Prices in Brazil, 1985–1995
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The Fisher Effect
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The Costs of Inflation
Shoe-leather costs
Menu costs
Unit-of-account costs
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Inflation and Nominal Interest Rates in the
U.S.
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The Great Disinflation of the 1980s
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Effects of Deflation
Effects of Unexpected Deflation:
- Debt deflation
Effects of Expected Deflation:
- Zero bound
- Liquidity trap
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Japan’s Trap
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The End of Chapter 33
coming attraction:
Chapter 35:
The Making of Modern
Macroeconomics
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