Chapter 11 Flashcards
Is Inflation a Problem?
If prices are increasing and nominal income does not increase or does not increase at the same rate, then purchasing power is reduced.
According to the classical view, a change in the price level is merely a change in the unit of measurement.
Some economists say 2-3 percent can be a good.
Make labour market work more efficiently because workers rarely accept wage cuts. If norminal wages cannot be cut, then the only way to cut wages is to let inflation do the job.
Social Costs of Inflation
- Expected Inflation
- Unexpected Inflation
- High Inflation
The Cost of Expected Inflation
- Shoe Leather Cost
- Menu Costs
- Relative Price Distortions
- Unfair Tax Treatment
- General Inconvenience
Shoe Leather Cost
The costs and inconveniences of reducing money balances to avoid the inflation tax.
Menu Costs
The costs of changing prices.
Relative Price Distortions
Firms facing menu costs change prices infrequently and at different times.
Unfair Tax Treatment
Taxes are not adjusted for inflation.
General Inconvenience
Difficult comparisons and long-range financial planning.
Cost of Unexpected Inflation
Arbitrary redistribution of purchasing power.
Inflation unequal Expected Inflation
Cost of High Inflation
Increased Uncertainty
When inflation is high, it is more variable and unpredictable. -> Arbitrary redistribution of wealth becomes more likely.
Hyperinflation
Inflation is equal or more than 50% per month.
Costs of moderate inflation become HUGE under hyperinflation.
Money ceases to function as a STORE VALUE and may not serve its other functions (UNIT OF ACCOUNT, MEDIUM OF EXCHANGE)
What causes hyperinflation?
Excessive money supply growth.
Central bank prints money rapidly to finance spending.
