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10 Macroeconomic Goals: Inflation (Consequences (Redistribution of…
10 Macroeconomic Goals:
Inflation
CPI
Problems with CPI
INCLUDE CPI TABLE
Cannot account for
variations in consumption
patterns due to
Increase in consumption due to
temporary sales and discounts
Different income groups consume
different combinations of goods
Consequences
Uncertainties
Less private investments
Lower production
of new capital goods
Lower R & D meaning less
technology improvments
Reduced economic growth
Discourages increases in potential output
Redistribution
of income
Holders of cash
are worse off
Payers of cash
are better off
Money illusion
Increase in nominal income
Exports more expensive to foreigners
Imports become cheaper to domestic buyers
Quantity of exports decrease
Quantity of imports increase
Current account deficit
Deflation
Eg.
UK
In 1922, UK experienced 14% deflation
Consequences
Redistribution of income
Holders of cash are better off
Payers of cash are worse off
Deflationary spiral
and high cyclical unemployment
cos price level fall
and people wait for it
to fall more
Bankruptcies and
financial crises
cos real value of debts increases
Demand-pull
inflation
Eg.
UK
:
Lawson Boom in the late 1980s
Unemployment fell from
3 million
(1986)
to
1.6 million
(1989), a 10 year low
Inflation rose to almost
10
% (1989)
Cost-push inflation
Eg.
UK
:
Increase in oil prices due to actions of OPEC
UK workers demanded higher nominal wages
Inflation of
25
%
Policies
Demand-pull
inflation
Expansionary
Monetary Policies
Expansionary
Fiscal Policies
Cost-push inflation
Contractionary
demand-side
policies
Supply-side
policies
Very high time lag
For trade-off between
unemployment and inflation
Trade-off
SRPC + AD/AS
No trade-off
LRPC + AD/AS
Evaluation: Use Keynesian
\(\textrm{UN}\downarrow, \rho ≠\uparrow\)