ECO 120 - Global Macroeconomics TAGGERT J. BROOKS.

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Multiple Choice Tutorial Chapter 8 Inflation

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Presentation transcript:

ECO Global Macroeconomics TAGGERT J. BROOKS

Module 14 INFLATION: AN OVERVIEW

The Natural Rate of Unemployment  The real wage is the wage rate divided by the price level.  Real income is income divided by the price level.  The inflation rate is the percent increase in the overall level of prices per year. Price level in year 1

Inflation and Deflation

 High rates of inflation impose significant economic costs.  Shoe-leather costs are the increased costs of transactions caused by inflation.  Menu cost is the real cost of changing a listed price.  Unit-of-account costs arise from the way inflation makes money a less reliable unit of measurement.

Winners and Losers from Inflation  Inflation changes the dollar repayment of a loan will be because the loan contract is stated in nominal terms.  The nominal interest rate is the interest rate expressed in dollar terms.  The real interest rate is the nominal interest rate minus the rate of inflation.  If inflation is higher than expected, borrowers gain at the expense of lenders.  If inflation is lower than expected, lenders gain at the expense of borrowers.

Inflation is Easy; Disinflation is Hard  Disinflation is the process of bringing the inflation rate down.

Inflation and Deflation