TAILIEUCHUNG - Lecture Economics (9/e): Chapter 35 - David C. Colander

Chapter 35 - Inflation, deflation, and macro policy. After reading this chapter, you should be able to: Discuss the definitions and measures of inflation and some of their problems, discuss the distributional effects and costs of inflation, summarize the inflation process and the quantity theory of money, define the Phillips curve relationship between inflation and unemployment. | The first few months or years of inflation, like the first few drinks, seem just fine. Everyone has more money to spend and prices aren’t rising quite as fast as the money that’s available. The hangover comes when prices start to catch up. ―Milton Friedman Inflation, Deflation, and Macro Policy Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter Goals Discuss the definitions and measures of inflation and some of their problems Discuss the distributional effects and costs of inflation Summarize the inflation process and the quantity theory of money Define the Phillips curve relationship between inflation and unemployment 2 Defining and Measuring Inflation Inflation is a continuous rise in the price level and is measured with price indexes Asset price inflation occurs when the prices of assets rise more than their “real” value Asset prices and goods prices don’t always move in tandem There is no measure of asset price inflation since it’s difficult to know when the real value of assets increase 3 Does Asset Inflation Matter? The ratio of nominal wealth to nominal GDP can serve as a rough estimate whether asset price inflation exceeds goods price inflation Asset price inflation can lead to serious misallocation of resources from conservative to risky investments Asset deflation reverses the effect of an asset inflation The pain caused by the asset price deflation exceeds the pleasure caused by the asset price inflation 4 Measuring Goods Market Inflation Inflation and deflation are measured with changes in price indexes The most frequently used price indices are: The producer price index (PPI) The GDP deflator The consumer price index (CPI) A price index is a number that summarizes what happens to a weighted composite of prices of a selection of goods over time 5 Real-World Price Indexes GDP deflator is an index of the price level of aggregate output relative to a base year Consumer price index (CPI) measures the prices of

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