1. Money, Inflation, Interest Econ 203/Brian Goff Department of Economics Western Kentucky University

2. Money, Money, Money

3. Money?

4. Keeping Money Safe

5. $25 in 1978 CPI = 67.5 $50 in 1989 CPI = 125 $100 in 2012 CPI = 225

6. “Payments” System and Wholesale Side of Money Markets $100 Visa purchase Macy’s “Visa” pays Macy’s Consumer installments Consumer installments to “Visa” but flows MMMF Pays “Visa” to “Visa” but flows MMMF Pays “Visa” to MMMF and holds CC Loan to MMMF and holds CC Loan (slow inflow requires 2-day loan) (slow inflow requires 2-day loan) GE Finance Loans MMMF GE Finance Loans MMMF for 2 days for 2 days

9. INFLATION Inflation (on an annual basis) is the percent change in the average price level for the year Inflation (on an annual basis) is the percent change in the average price level for the year Monthly Inflation = 100% x (CPI now – CPI last month)/ CPI last month Annualized = x 4

10. U.S. Inflation Since 1960

11. Effects of Inflation Effects of inflation: Effects of inflation: $10 item after 1 year of inflation @ $10 item after 1 year of inflation @ 2% = $10.20 2% = $10.20 10% = $11 10% = $11 100% = $20 100% = $20 1000% = $110 1000% = $110 10,000% = $1100 10,000% = $1100 1 million % = 1 million % = Formula is P*(1 + decimal inflation rate) Formula is P*(1 + decimal inflation rate)

12. INFLATION TOP 10 (cia world fact book, 2008) UzbekistanUzbekistan 16.00 2007 est. Uzbekistan AfghanistanAfghanistan 16.30 2005 est. Afghanistan IranIran 17.00 2007 est. Iran Sao TomeSao Tome 17.00 2007 est. Sao Tome CongoCongo 18.20 2006 est. Congo GuineaGuinea 20.00 2007 est. Guinea VenezuelaVenezuela 20.70 2007 est. Venezuela BurmaBurma 39.50 2007 est. Burma ZimbabweZimbabwe 26,470 2007 est. Zimbabwe

13. Factors influencing inflation: Factors influencing inflation: Supply and Demand for Money Inflation = % Change Money Supply Inflation = % Change Money Supply + % Change in Velocity of Money + % Change in Velocity of Money - % Change in real income - % Change in real income