Download Great Inflation – Episode 3 Transcript

Great Inflation – Episode 3 Transcript
Narrator: When last we left our story, Dr. Equilibrium and Jack were helping Andy understand
what inflation is and how to measure it.
Narrator: What will Dr. Equilibrium show Jack and Andy at Widgets, Incorporated? How are
widgets related to inflation?
Narrator: Keep watching to find out that, and more, in episode three: Too Much Money
Chasing Too Few Goods!
Andy: Wow! Look at all this stuff. Who would buy this? And, what does it have to do with
inflation?
Dr. Equilibrium: Well, people with money buy this stuff. They buy it because they want it more
than the other things they could buy and more than saving their money. Imagine for a
moment there was a superhero who could magically double the amount of money in
everyone’s wallet every night. What would likely happen?
Andy: They would spend it. I mean, gosh, I would. (thought bubble of things that Andy could
buy) I suppose many of these people would buy this stuff.
Dr. Equilibrium: How would Widgets, Incorporated respond to the increase in sales?
Jack: If I were the manager I would increase production to sell as much as I could!
Dr. Equilibrium: That’s correct. But what happens if you’re producing as much as you can and
you still can’t keep up with orders?
Jack (thinking): I guess I would start to raise prices.
Dr. Equilibrium: Exactly! And other firms would act in a similar way. Economists call this “too
much money chasing too few goods.” In other words, the amount of money in the economy is
growing at a faster rate than the quantity of goods and services in the economy.
Narrator: In the short run, an increase in the money supply can be stimulative and cause an
increase in production and employment. But in the long run, it can cause inflation. If the
money supply were to continue to double every night and prices were to rise every morning,
how might your expectations change?
Jack: I would expect prices to continue to rise. I would use my superior speed to get to the
store to buy what I could before prices went up again.
Dr. Equilibrium: Exactly. You and others would accelerate your purchases. Stores would
respond by raising prices even more. So, this would start a cycle that would be tough to
break. Soon everyone would expect a certain amount of inflation in prices and wages. Let’s
assume that consumers expected a 10 percent inflation rate.
Narrator: They would expect to pay 10 percent more of goods and services. Workers would
expect a 10 percent increase in their paychecks to make up for the higher prices. Producers
would expect 10 percent more for their goods and services to make up for the higher wages
and other costs that they pay.
Andy: But don’t higher prices just mean higher revenues for the firm so they can pay the
higher wages and costs of producing the goods?
Dr. Equilibrium: You are very astute, Andy.
Jack: (looking at Dr. Equilibrium) Doc, I’m shocked. (looking at Andy) Don’t let him call you
that, Andrew. You are my sidekick, and, as such, you deserve a little respect!
Dr. Equilibrium: It was a compliment, Jack. There’s an idea in economics called money
neutrality. The theory states that, in the long-run, changes in the money supply cause
changes in variables such as prices and wages, but not in employment or real—or inflationadjusted—variables such as real GDP, and real consumption.
Dr. Equilibrium: So, the number of people employed does not increase, the amount of goods
and services produced does not increase, and people do not buy more goods and services—
only prices increase.
Andy: So? I don’t see the downside.
Jack: (to Andy) That’s because you have the eyesight of a mere mortal. (to Dr. Equilibrium)
Perhaps we need to show Andrew another example, Doc.
Dr. Equilibrium: Not to worry, Andy. A history lesson might help you see the impact inflation
can have. Jack, do you have any superhero friends who would share their time-traveling
powers with us?
Jack: Of course I do! I’ll see if Epoch’s fixed his time machine.
Narrator: Will Jack, Andy, and Dr. Equilibrium be transported back in time? Will Jack ever
come face-to-face with the evil villain—inflation? Will Andy recognize the consequences of
inflation? What will happen next?
Narrator: Tune in next time for episode 4, Considering the Costs—of Justice!