Inflation, Disinflation, and DeflationChapter 16THIRD EDITIONECONOMICSandMACROECONOMICSPaul Krugman | Robin Wells
•Why efforts to collect an inflation taxby printing money can lead to high rates of inflation and hyperinflation•What the Phillips curveis and the nature of the short-run trade-off between inflation and unemployment•Why there is no long-run trade-off between inflation and unemployment•Why expansionary policies are limited due to the effects of expected inflation•Why even moderate levels of inflation can be hard to end•Why deflation is a problem for economic policy and leads policy makers to prefer a low but positive inflation rate•Why the nominal interest rate cannot go below the zero boundand the danger this poses of the economy falling into a liquidity trap, making conventional monetary policy ineffectiveWHAT YOUWILL LEARNIN THIS CHAPTER
Money and Prices•In the short run, an increase in the money supply increases real GDP. Lowers the interest rate, stimulating investment spending and consumer spending.•In the long run, as sticky nominal wages and prices rise, an increase in the money supply does not change real GDP. Leads to an equal percentage rise in the aggregate price level.In the long run, the real quantity of money, , doesn’t change.•According to the classical model of the price level, the real quantity of money is always at its long-run equilibrium level.
Money and PricesYPP3P1E1AD1SRSRAS1LRASAggregateprice levelReal GDPPotentialoutputY1P2E2AD2E3AS2In the classical model of the price level, the transition from E1 to E3 happens instantaneously—there is no short-run.The classical model of the price level turns out to be a good approximation of the conditions of high inflation.
Money Supply Growth and Inflation in ZimbabweIn 2008, Zimbabwe experience the highest inflation rate ever recorded. The government continued printing more money at higher denominations (half-billion dollar bills, for example), and prices rose right along with it.
Money Supply Growth and Inflation in BrazilA similar episode occurred in Brazil in the late 1980s and early 1990s. Surges in the growth rate of the money supply resulted in nearly simultaneous surges in inflation.
The Inflation Tax•The Federal government’s right to print money is itself a source of revenue, referred to as seignorage.The government can print money in order to cover its budget deficit.But sooner or later this increase in the money supply leads to an increase in inflation.•The so-called inflation taxisn’t really a “tax” in the true sense of the word. It’s the reduction in the real value of money held by the public caused by inflation.It occurs when the government prints money to cover its budget deficit, creating inflation.