Module Types of Inflation, Disinflation, and Deflation KRUGMAN'S MACROECONOMICS for AP* 33 Margaret Ray and David Anderson.

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Module Types of Inflation, Disinflation, and Deflation KRUGMAN'S MACROECONOMICS for AP* 33 Margaret Ray and David Anderson

What you will learn in this Module : The classical model of the price level Why efforts to collect an inflation tax by printing money can lead to high rates of inflation and even hyperinflation The types of inflation: cost-push and demand-pull

The Classical Model of Money and Prices The Classical Model of Money and Prices %∆ M = %∆ PL Classical Model of the Price Level (E to E’’)...Good assumption given high inflation Classical Model ignores short-run changes ( E to E’)... Poor assumption given low inflation.

The Inflation Tax The Inflation Tax Independent central banks issue fiat money Monetizing the debt Seignorage Inflation Tax

The Logic of Hyperinflation The Logic of Hyperinflation Impact of inflation tax on people’s decision to hold money Why print large sums of money? Taxi analogy Substituting commodities for currency

Moderate Inflation and Disinflation Cost-push inflation Demand-pull inflation Politically motivated inflation Disinflation? Former Federal Reserve Chairman, Alan Greenspan

The Output Gap and the Unemployment Rate Output Gap Actual Output = Potential Output.: Actual Unemployment = Natural Rate of Unemployment Actual Output > Potential Output.: Actual Unemployment < Natural Rate of Unemployment Actual Output Natural Rate of Unemployment