copyright 2004 south-western inflation-related topics mod 33

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Copyright © 2004 South-Western Inflation- Inflation- Related Topics Related Topics Mod Mod 33 33

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Copyright © 2004 South-Western Nominal Interest Rate and the Inflation Rate Copyright © 2004 South-Western Percent (per year) Inflation Nominal interest rate

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Page 1: Copyright  2004 South-Western Inflation-Related Topics Mod 33

Copyright © 2004 South-Western

Inflation-Related Inflation-Related TopicsTopics

Mod Mod 3333

Page 2: Copyright  2004 South-Western Inflation-Related Topics Mod 33

Copyright © 2004 South-Western

Inflation and Interest RatesInflation and Interest Rates

•The Fisher effect refers to a one-to-one adjustment of the nominal interest rate to the inflation rate.

•According to the Fisher effect, when the rate of inflation rises, the nominal interest rate rises by the same amount.

•The real interest rate stays the same.

•Real Interest = Nominal Interest - Inflation

Page 3: Copyright  2004 South-Western Inflation-Related Topics Mod 33

Copyright © 2004 South-Western

Nominal Interest Rate and the Inflation Rate

Copyright © 2004 South-Western

Percent(per year)

1960 1965 1970 1975 1980 1985 1990 1995 20000

3

6

9

12

15

Inflation

Nominal interest rate

Page 4: Copyright  2004 South-Western Inflation-Related Topics Mod 33

Copyright © 2004 South-Western

Types & Issues with Inflation

• Demand-pull Inflation• Politically-motivated Inflation

• Cost-push Inflation• Monetary Inflation

• Changes to the money supply (The Fed)• Disinflation• Deflation

Page 5: Copyright  2004 South-Western Inflation-Related Topics Mod 33

Copyright © 2004 South-Western

Demand-Pull Inflation

• More demand for goods than there are goods available

• Occurs because of •Lack of goods available•Econ expansion•Political Motivations

Page 6: Copyright  2004 South-Western Inflation-Related Topics Mod 33

Copyright © 2004 South-Western

Cost-Push Inflation

• Higher input costs in production drive up prices

• Can occur because of:• Increased costs overall of Land, Labor,

Capital• Increased costs due to Gov’t Regulations• Supply shocks

Page 7: Copyright  2004 South-Western Inflation-Related Topics Mod 33

Copyright © 2004 South-Western

Monetary Inflation and the Quantity Equation

• This is Inflation due to amount of Money Supply

• Can be due to Fed ActionsThe Quantity Equation relates the quantity of money (M) and the velocity of transactions to

the nominal value of outputM x V ≡ Q x P

M = quantity of moneyV = velocityP = the price levelQ = the quantity of output

Page 8: Copyright  2004 South-Western Inflation-Related Topics Mod 33

Copyright © 2004 South-Western

Disinflation

• Disinflation refers to the actions to try to reduce inflation

• Disinflation is difficult• AD/AS graph

Page 9: Copyright  2004 South-Western Inflation-Related Topics Mod 33

Copyright © 2004 South-Western

Deflation

• Definition• Debt Deflation• Effects of Expected Deflation• Zero Bound• Liquidity Trap

Page 10: Copyright  2004 South-Western Inflation-Related Topics Mod 33

Copyright © 2004 South-Western

Worksheet Practice

• Fisher effect• Types of Inflation• Monetary Equation