Download 13.2 Inflation

13.2 Inflation
Objectives
 Describe the types of inflation, and
identify two sources of inflation.
 Identify the problems that unexpected
inflation creates.
CONTEMPORARY ECONOMICS
© Thomson South-Western
13.2 Inflation
Key Terms
 inflation
 demand-pull inflation
 cost-push inflation
 nominal interest rate
 real interest rate
CONTEMPORARY ECONOMICS
© Thomson South-Western
13.2 Inflation
SLIDE
3
Inflation Basics
Inflation is an increase in the economy’s
general price level.
CONTEMPORARY ECONOMICS
© Thomson South-Western
13.2 Inflation
SLIDE
4
Types of Inflation
Hyperinflation—extremely high inflation
Disinflation—a reduction in the rate of
inflation
Deflation—a decrease in the general price
level
CONTEMPORARY ECONOMICS
© Thomson South-Western
13.2 Inflation
SLIDE
5
Two Sources of Inflation
Demand-pull inflation is inflation
resulting from increases in aggregate
demand.
Cost-push inflation is inflation stemming
from decreases in aggregate supply.
CONTEMPORARY ECONOMICS
© Thomson South-Western
13.2 Inflation
SLIDE
6
Inflation Caused by Shifts of the Aggregate
Demand and Aggregate Supply Curves
(a) Demand-pull inflation:
inflation caused by an
increase of aggregate
demand
(b) Cost-push inflation:
inflation caused by a
decrease of aggregate
supply
Figure 13.4
CONTEMPORARY ECONOMICS
© Thomson South-Western
13.2 Inflation
SLIDE
7
Consumer Price Index Since 1913
 Despite fluctuations,
the price level, as
measured by the
consumer price
index, was lower in
1940 than in 1920.
 Since 1940, the
price level has risen
almost every year.
Figure 13.5
CONTEMPORARY ECONOMICS
© Thomson South-Western
13.2 Inflation
SLIDE
8
Impact of Inflation
Inflation reduces the value of the dollar
and takes away confidence in the value of
the dollar over the long term.
CONTEMPORARY ECONOMICS
© Thomson South-Western
13.2 Inflation
SLIDE
9
Expected Versus
Unexpected Inflation
Unexpected inflation creates more
problems for the economy than does
expected inflation.
To the extent that inflation is higher or
lower than expected, it arbitrarily creates
economic winners and losers.
CONTEMPORARY ECONOMICS
© Thomson South-Western
13.2 Inflation
SLIDE
10
The Transaction Costs
of Unexpected Inflation
Reduced productivity
Increased transaction costs of market
exchange
CONTEMPORARY ECONOMICS
© Thomson South-Western
13.2 Inflation
SLIDE
11
Inflation and Interest Rates
 Nominal interest rate—the interest rate
expressed in current dollars as a percentage of
the amount loaned; the interest rate on the loan
agreement.
 Real interest rate—the interest rate expressed
in dollars of constant purchasing power as a
percentage of the amount loaned; the nominal
interest rate minus the inflation rate.
Real interest rate = Nominal interest rate – Inflation rate
CONTEMPORARY ECONOMICS
© Thomson South-Western