Unit 10. Income, Consumption and Saving Unit 10. Income, Consumption and Saving. Inflation: causes and consequences IES Lluís de Requesens (Molins de Rei)‏ Batxillerat Social Economics (CLIL) – Innovació en Llengües Estrangeres Jordi Franch Parella

Surplus and Deficit Y = C + I + G Y – C – G = I (Total Saving = Total Investment) (Y – C – T) + (T – G) = I (Private Saving + Public Saving = Total Investment)‏ Private Saving is the income left after families have paid taxes and consumption Public Saving is the revenue left after government has paid its spending If T > G, the government runs a budget surplus If G > T, the government runs a budget deficit

Causes of Inflation Quantitative Theory of Money: M . V = P . Y; where M is the money supply, V the velocity of circulation of money, P the overall level of prices, Y the real GDP V tends to be stable over time An increase in M leads to an increase in P Then, inflation is always and everywhere a monetary phenomenon

Causes of Inflation

Causes of Inflation

Causes of Inflation

Consequences of Inflation A decrease in the purchasing power of money It hurts the creditors and benefits the debtors --> arbitrary redistribution of wealth Unemployment A decrease in the international competitiveness Incorrect allocation of resources

Consequences of Inflation Shoeleather costs, menu costs Inflation increases the tax burden and exaggerates the capital gains and the profits --> decapitalization of firms It hurts saving for many reasons: it hurts creditors, the after-tax real interest rate falls An uncontrolled inflation can turn itself in hyperinflation (= the death of the society)‏