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Inflation and Deflation, Captura de Pantalla 2021-09-06 a la(s) 10.51.42 p…
Inflation and Deflation
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The cost of inflation
The inflation fallacy: economists don't see a necessary connection between inflation and changes in living standards. The reason is that inflation increases all the economy's prices including wages and salaries.
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Distracted firms: managers must push their customers to pay bills promptly; before inflation erodes the value of payments.
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Income inequality: inflation increase the inequality between rich and poor because the poor have large money holdings, by contrast, the rich have access to bank accounts with high nominal interest rates that compensate for inflation.
After-tax real interest rate: `r= (1-u)r - (u*phi)
Is the interest rate adjusted for both taxes and inflation.
Deflation and the liquidity trap:
Deflation can occur if the economy falls into a liquidity trap, a situation in which output is below potential at a nominal interest rate of zero. This zero-bound problem eliminate the central banks ability to raise output and inflation.
Zero bound: limit on the nominal interest rate; a central bank cannot reduce i below zero, which limits its ability to stimulate the economy.
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