Download 7. Demand-pull inflation

Chapter 32 Summary
http://www.mhhe.com/economics/samuelson17/students/summ32.mhtml
A. Nature and Impacts of Inflation
1. Recall that inflation occurs when the general level of prices is rising. The
rate of inflation is the percentage change in a price index from one period to
the next. The major price indexes are the consumer price index (CPI) and the
GDP deflator.
2. Like diseases, inflations come in different strains. We generally see low
inflation in the United States (a few percentage points annually). Sometimes,
galloping inflation produces price rises of 50 or 100 or 200 percent each year.
Hyperinflation takes over when the printing presses spew out currency and
prices start rising many times each month. Historically, hyperinflations have
almost always been associated with war and revolution.
3. Inflation affects the economy by redistributing income and wealth and by
impairing efficiency. Unanticipated inflation usually favors debtors, profit
seekers, and risk-taking speculators. It hurts creditors, fixed-income classes,
and timid investors. Inflation leads to distortions in relative prices, tax rates,
and real interest rates. People take more trips to the bank, taxes may creep
up, and measured income may become distorted. And when central banks
take steps to lower inflation, the real costs of such steps in terms of lower
output and employment can be painful.
B. Modern Inflation Theory
4. At any time, an economy has a given inertial or expected inflation rate. This
is the rate that people have come to anticipate and that is built into labor
contracts and other agreements. The inertial rate of inflation is a short-run
equilibrium and persists until the economy is shocked.
5. In reality, the economy receives incessant price shocks. The major kinds of
shocks that propel inflation away from its inertial rate are demand-pull and
cost-push. Demand-pull inflation results from too much spending chasing too
few goods, causing the aggregate demand curve to shift up and to the right.
Wages and prices are then bid up in markets. Cost-push inflation is a new
phenomenon of modern industrial economies and occurs when the costs of
production rise even in periods of high unemployment and idle capacity.
6. The Phillips curve shows the relationship between inflation and
unemployment. In the short run, lowering one rate means raising the other.
But the short-run Phillips curve tends to shift over time as expected inflation
and other factors change. If policymakers attempt to hold unemployment
below the NAIRU for long periods, inflation will tend to spiral upward.
7. Modern inflation theory relies on the concept of the nonaccelerating
inflation rate of unemployment, or NAIRU, which is the lowest NAIRU that the
nation can enjoy without risking an upward spiral of inflation. It represents
the level of unemployment of resources at which labor and product markets
are in inflationary balance. Under the NAIRU theory, there is no permanent
tradeoff between unemployment and inflation, and the long-run Phillips curve
is vertical.
C. Dilemmas of Anti-inflation Policy
8. A central concern for policymakers is the cost of reducing inertial inflation.
Current estimates indicate that a substantial recession is necessary to slow
inertial inflation.
9. Economists have put forth many proposals for lowering the NAIRU; notable
proposals include improving labor market information, improving education
and training programs, and refashioning government programs so that
workers have greater incentives to work. Sober analysis of politically viable
proposals leads most economists to expect only small improvements from
such labor market reforms.
10. Because of the high costs of reducing inflation through recessions, nations
have often looked for other approaches. These are incomes policies such as
wage-price controls and voluntary guidelines, tax-based approaches, and
market-strengthening strategies.
CONCEPTS FOR REVIEW
History
and
Inflation(t)
=
[P(t)
strains of inflation:
-
Theories
P(t
-
of
1)]/P(t
-
1)
Inflation
×
100
low
galloping
hyperinflation
impacts
of
inflation
anticipated
inflation
costs of inflation:
"shoe
menu
income
loss of information
(redistributive,
and
and
on
output
tax
and
employment)
unanticipated
leather"
costs
distortions
inertial,
demand-pull,
and
cost-push
inflation
short-run
and
long-run
Phillips
curves
nonaccelerating inflation rate of unemployment (NAIRU) and the long-run
Phillips curve
Anti-inflation
costs
of
Policy
disinflation
measures
to
alternative anti-inflation policies:
incomes
competition
TIP
profit sharing
lower
the
NAIRU
policies
Chapter 32 Preliminary Quiz
http://www.mhhe.com/economics/samuelson17/students/quiz32pre.mhtml
Ensuring Price Stability
Multiple Choice Questions:
Enter your answer to each of the questions in the blank to the left of the question.
Be sure to use lowercase letters only!
1. When the general level of prices is rising, we call that:
a. deflation.
b. inflation.
c. elevation.
d. none of the above.
2. When prices rise slowly and predictably, we call that:
a. galloping inflation.
b. low inflation.
c. hyperinflation.
d. deflation.
3. When inflation is in the double or triple digits, we call that:
a. galloping inflation.
b. low inflation.
c. hyperinflation.
d. deflation.
4. When inflation is at a million or trillion percent per year, we call that:
a. galloping inflation.
b. low inflation.
c. hyperinflation.
d. deflation.
5. In general, unanticipated inflation will be good for:
a. debtors.
b. creditors.
c. lenders.
d. none of the above.
6. Hyperinflations are associated with ______ growth, low inflation is associated
with _______ growth, and deflations are associated with _______ growth.
a. rapid; rapid; negative
b. negative; rapid; rapid
c. negative; rapid; slow
d. slow; rapid; negative.
7. Demand-pull inflation occurs when:
a. imports exceed exports.
b. aggregate demand rises more rapidly than the economy's productive
potential.
c. both a and b.
d. neither a nor b.
8. Inflation resulting from rising costs during periods of high unemployment and
slack resource utilization is called:
a. demand-pull inflation.
b. supply-pull inflation.
c. cost-pull inflation.
d. inertial inflation.
9. _______ occurs when the AS and AD curves are moving steadily upward at the
same rate.
a. demand-pull inflation.
b. supply-pull inflation.
c. cost-pull inflation.
d. inertial inflation.
10. The short-run _______ shows the inverse relationship between inflation and
unemployment.
a. aggregate supply curve
b. aggregate demand curve
c. Phillips Curve
d. NAIRU
11. The unemployment rate consistent with a constant inflation rate is called:
a. NAIRU
b. hyperinflation
c. Phillips rate
d. none of the above.
12. The long-run Phillips curve:
a. is horizontal at the NAIRU.
b. is vertical at the NAIRU.
c. is fixed at the origin.
d. does not exist.
Grade the Quiz
Chapter 32 Preliminary Quiz Grade
Question
Your
Answer
Grade
Correct Answer
1.
incorrect
b. When the general level of prices is rising,
we call that inflation. See page 683.
2.
incorrect
b. When prices rise slowly and predictably, we
call that low inflation. See page 685.
3.
incorrect
a. When inflation is in the double or triple
digits, we call that galloping inflation. See
page 687.
4.
incorrect
c. When inflation is at a million or trillion
percent per year, we call that hyperinflation.
See page 687.
5.
incorrect
a. In general, unanticipated inflation will be
good for debtors. See page 689.
6.
incorrect
c. Hyperinflations are associated with negative
growth, low inflation is associated with rapid
growth, and deflations are associated with
slow growth. See page 690.
7.
incorrect
b.
Demand-pull
inflation
occurs
when
aggregate demand rises more rapidly than the
economy's productive potential. See page 692.
8.
incorrect
c. Inflation resulting from rising costs during
periods of high unemployment and slack
resource utilization is called cost-pull inflation.
See page 692.
9.
incorrect
d. Inertial inflation occurs when the AS and AD
curves are moving steadily upward at the
same rate. See page 693.
10.
incorrect
c. The short-run Phillips Curve shows the
inverse relationship between inflation and
unemployment. See page 695.
11.
incorrect
a. The NAIRU is the unemployment rate
consistent with a constant inflation rate. See
page 696.
12.
incorrect
b. The long-run Phillips curve is vertical at the
NAIRU. See page 698.
Click to return to Quiz Index
Chapter 32 Post Quiz
http://www.mhhe.com/economics/samuelson17/students/quiz32post.mhtml
Ensuring Price Stability
Matching Questions:
Match the terms on the left with the definition in the column on the right. Enter the
lowercase letter of that definition in the box to the left of the question number.
1. Inflation
a. gain from unanticipated inflation.
2. Low inflation
b. when prices rise slowly and predictably.
3. Galloping inflation
c. occurs when aggregate demand rises more
rapidly then the economy's productive potential.
4. Hyperinflation
d. when inflation is in the double or triple digits.
5. Debtors
e. results from rising costs during periods of
high unemployment and slack resource
utilization.
6. Negative growth
f. associated with hyperinflation.
7. Demand-pull inflation
g. when inflation is at a million or trillion percent
per year.
8. Cost-pull inflation
h. occurs when the AS and AD curves are moving
steadily upward at the same rate.
9. Inertial inflation
i. the unemployment rate consistent with a
constant inflation rate.
10. Phillips curve
j. when the general level of prices is rising.
11. NAIRU
k. shows the inverse relationship between
inflation and unemployment.
12. Vertical
l. describes the long-run Phillips curve.
Grade the Quiz
Chapter 32 Post Quiz Grade
Question
Your
Answer
Grade
Correct Answer
1.
incorrect
j. Inflation is when the general level of prices
is rising. See page. 683.
2.
incorrect
b. When prices rise slowly and predictably, we
call that low inflation. See page 685.
3.
incorrect
d. When inflation is in the double or triple
digits, we call that galloping inflation. See
page 687.
4.
incorrect
g. When inflation is at a million or trillion
percent per year, we call that hyperinflation.
See page 687.
5.
incorrect
a. Debtors gain from unanticipated inflation.
See page 689.
6.
incorrect
f. Negative growth is associated
hyperinflation. See page 690.
7.
incorrect
c.
Demand-pull
inflation
occurs
when
aggregate demand rises more rapidly then the
economy's productive potential. See page 692.
8.
incorrect
e. Cost-pull inflation results from rising costs
during periods of high unemployment and
slack resource utilization. See page 692.
9.
incorrect
h. Inertial inflation occurs when the AS and AD
curves are moving steadily upward at the
same rate. See page 693.
10.
incorrect
k. The Phillips curve shows the inverse
relationship
between
inflation
and
unemployment. See page 695.
11.
incorrect
i. The NAIRU is the unemployment rate
consistent with a constant inflation rate. See
page 696.
12.
incorrect
l. The long-run Phillips curve is vertical. See
page 698.
Click to return to Quiz Index
with