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INFLATION AND DEFLATION - Coggle Diagram
INFLATION AND DEFLATION
WHAT DETERMINES MONEY GROWTH?
Commodity Money
Monney supply is determined by how much of the commodity is produced
determining factor was developments in the minning ndustry
Fiat money and Inflation
Controled by an economy's centtral bank
By open-market operations
allow it to change money supply at whatever rate
The Output-Inflation Trade-Off
Output raises inflation through the Phillips curve
Increase people incomes
reduces unemployment
In the case of a adverse supply shock
allow inflation
Keep the output from falling below potential
Poliy of reducing inflation
Cause a temporary output loss
Seigniorage and Very high Inflation
Government budget deficits
Expend more than money raised by taxes
Covered by bonds
It increase the interest rates
less inversion
Purchased by the central bank
Increase in the monetary base
Raises the money supply
Then inflation
Seigniorage revenue
https://www.investopedia.com/terms/s/seigniorage.asp#:~:text=Seigniorage%20may%20be%20counted%20as%20revenue%20for%20a,of%20their%20expenditures%20without%20having%20to%20collect%20taxes
.
MONEY AND INFLATION IN THE LONG RUN
Decade or more average inflation
correlate to the growth of the money supply
Velocity and the quantity equation
Velocity of money
ratio of total spending in the economy
to the money supply
Total spending= GDP
GDP= PY
Y=real Output
P=Price levels
number of times a dollar is spent over a year
Quantity equation of money
Total spending in a economy equals the money supply
times the number of times each dollar is spent
Money market in equilibrium
Money supply=Money demand
The Data
Deriving the inflation rate
Growth rate of the price level
%Change(MV)=%Change(PV)
π= %Change in V + %Change in P - %Change in Y
Outside the control of the central bank
Output growth
Long-run changes in velocity
inside the control of the central bank
growth rate of money supply
The Phillips curve again
Inflation deoends on past inflation,
output and supply shocks
Higher money grwoth pushes down the nominal interest rato, which reduces the real rate for a given level of expected inflation. The lower real interest rate moves the economy along the aggregate expenditure curve, raising output.
higuer output moves the economy along the Phillips curve, raising the inflation rate
THE COST OF INFLATION
The inflation fallacy
Thing become more expensive
Standard of living suffers
Very high inflation
Shoe leather costs
Distracted firms
Relative-price variability
Income Inequality
Moderate inflation
Inflation uncertainty
Variability of inflation is higher when its average level is high
creates risk in loan markets
redistribution can harm the economy
Could make to banks insolvents to pay investors interests
Inflation and taxes
When inflation raises
people pay higher taxes on the income they earn from savings
Taxes are based on nominal quantities
10%
DEFLATION AND THE LIQUIDITY TRAP
Money growth again
Deflation arises when money growth is low
E.J 1930-1933. The money supply fell because bank panics reduces the money multiplier
Irreelevance
why cant the central bank push it above zero by raising money growth?
The liquidity Trap
Output is below potential at a nominal interes rate of zero
Eliminates the central bank ability to raise output and inflation
A negative nominal interest rate is impossible
Implies a lower bound on the real rate as well
Best to do is to redduce the real rate to -π
Role of deflation
A positive bound makes more difficult for central bank to push the real rate low enough to end a recession
Inflation rate is positive but low its also danger
low enough to boost output to potential
High real interest rate keeps the
economy in a recession
https://www.investopedia.com/terms/l/liquiditytrap.asp
Any Escaping?
Reducing long-term interest rates
Raising expected inflation
Using fiscal policy
