Class notes
Lecture notes: Inflation, unemployment, monetary policy
An extensive document of the lecture notes
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
Seller
Follow
Content preview
Unit 15: Inflation,Unemployment, and Monetary
policy
What is inflation?
Inflation: The continuous and considerable increases in the general price level.
Zero inflation: A constant price level from year-to-year.
Deflation: A decrease in the general price level.
Disinflation: A decrease in the rate of inflation.
- Economic booms are accompanied by a dramatic increase in inflation.
- Inflation tends to be higher in poor than in rich countries
What is wrong with inflation?
- Decreases purchasing power of each unit of currency that you have.
- Erodes people’s financial assets
- Reduces the real value of debt
The Fisher equation
Real interest rate is equal to the difference between the nominal interest rate and expected inflation
-
Real interest rate (% per annum)=Nominal interest rate (% per annum) – the inflation rate(% per annum )
High rate of inflation reduces the performance of the economy
- Large price changes create uncertainty and make it more difficult for individuals and firms to
make decisions based on prices.
- It is harder for producers to distinguish between changes in relative prices (signal about
scarcity) and inflation.
- Menu costs as firms have to update their prices more frequently
What is wrong with deflation?
Deflation could have an even more dramatic consequence than high inflation.
When prices are falling, households will postpone consumption (particularly of durables) because
they expect goods will be cheaper in the future. This is similar to a negative shock to aggregate
demand.
, Deflation increases the real debt burden, which may lead households to cut consumption to return
to their target wealth.
Benefits of inflation:
- Greases the wheels of the labour market
- Gives monetary policy more room to manoeuvre.
Causes of inflation
The labour market at Nash equilibrium:
- The wage rate and the price level are consistent with the firms maximizing their profits, then
there will be no reason for either prices or wages to be changed.
- At this unemployment rate, the price level is constant ( zero inflation). This is the level of
unemployment where the wage-setting and price-setting curves intersect.
Inflation arises from conflicts among economic actors when they are powerful enough that their
claims on goods and services are inconsistent.
Inflation may be due to:
- Increases in the bargaining power of firms over their consumers
- Increases in the bargaining power of workers over the firms, due to higher bargaining power
or higher employment.
Figure 15.2: Three causes of inflation: Changes in bargaining power
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through EFT, credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying this summary from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller claudiacloete112. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy this summary for R50,00. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
61001 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy summaries for 14 years now