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Inflation and Deflation - Coggle Diagram

- - - - Quantity equation of maney relationship among the maney suppl velocity and nominal GDP: MV = PY
        
        This quantity equation of money says that total spending in the economy (PY) equals the money supply (M ) times the number of times each
        dollar is spent (V ). If M is $100 and V is 5, then total spending is $500
  - - - (% change in M) = (% change in V) = (% change in P) = (% change in Y)
        
        Inflation = (% change in M ) = (% change in V ) = (% change in Y) )
        
        Output growth depends on factors that affect the economy’s productivity, such as new technologies. Long-run neutrality means that
        monetary policy is irrelevant.
        
        Long-run changes in velocity are driven primarily by changes in transaction technologies—the methods people use to acquire and spend
        money.
  - - - Instead, higher money growth sets off a chain of
        events that involves the Phillips curve
- - - - The slow money growth of the early gold-standard period led to deflation: the inflation rate averaged 1 percent from 1879 to 1897
        
        CASE STUDY The Free Silver Movement,
        
        Supporters of higher inflation pushed for a monetary system called Bimetallism (literally, two metals). In this system, the government would issue money backed by silver as well as by gold.
  - - - Sometimes, however, governments with deficits have trouble selling bonds. When private savers refuse to buy government bonds, the government turns to another buyer: the central bank.
      - So when the government sells bonds to the central bank, it does not really create a debt to an outside entity. In effect, the central bank just creates money and gives it to the government
- - - - The reason is that inflation increases all the economy’s prices—including
        wages and salaries.
  - - - If people lack bank accounts, as is common in developing countries, they rush to buy goods as soon as they receive their pay. They buy things they don’t really want just to get rid of cash.
    - - When inflation is high, all firms raise their prices
        by large amounts. But they do so at different times.
    - - High inflation hurts the overall economy, but the biggest
        problem may be the unevenness of its effects.
  - - - Uncertainty about inflation creates risk in loan markets. When inflation changes unpredictably, the ex post real interest rate differs from the ex ante rate
    - - The final inflation cost we’ll discuss involves taxation. When inflation rises, people pay higher taxes on the income they earn from savings.
- - - - Lower Bounds on Interest Rates
        
        Zero bound limit on the nominal interest rate; a central bank cannot reduce i below zero, which limits its ability to stimulate the economy
      - The Role of Deflation
        
        Although deflation raises the risk of a liquidity trap, danger also exists if the inflation rate is positive but low. Inflation of 1 percent, for example, means the lower bound on the real interest rate is 1 percent. That level is usually low enough to boost output to potential, but it may not be during an unusually deep recession
      - The Irrelevance of Money Growth
  - - - . The central bank can reduce long-term rates by reducing
        either expected short rates or term premiums.