1. 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

2. 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

3. 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

4. Causes of Inflation

5. Causes of Inflation

6. Causes of Inflation

7. 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

8. 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)‏