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Module 14 Inflation: An Overview KRUGMAN'S MACROECONOMICS for AP* Margaret Ray and David Anderson What you will learn in this Module: • The economic costs of inflation • How inflation creates winners and losers • Why policy makers try to maintain a stable rate of inflation • The difference between real and nominal values of income, wages, and interest rates • The problems of deflation and disinflation The Level of Prices Doesn’t Matter... •Misconception •It’s all relative •Real Wage •Real Income ...But the Rate of Change of Prices Does • Inflation Rate Inflation rate = Price level in year 2 - Price level in year 1 Price level in year 1 •Shoe-Leather Costs •Hyperinflation •Menu Costs •Unit-of-Account Costs X 100 Winners and Losers from Inflation • Nominal contracts • Nominal interest rate v. real interest rate Inflation is Easy; Disinflation is Hard • Disinflation • The cost of disinflation • Policy response to inflation
