Lecture+12 - Economics 102 Lecture 12: The Costs of...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Economics 102 Lecture 12 : The Costs of Inflation LECTURE 12 THE COSTS OF INFLATION 1 The Costs of Inflation § Why do we care about inflation? If incomes rise as prices rise, what is the problem? LECTURE 12 THE COSTS OF INFLATION 2 In this lecture, look for the answers to these questions: § How is inflation like a tax? § How does inflation affect interest rates? § What are the costs of inflation? How serious are they?
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 LECTURE 12 THE COSTS OF INFLATION 3 The Costs of Inflation § Hyperinflation can be very costly. § But, what about mild inflation? LECTURE 12 THE COSTS OF INFLATION 4 The Inflation Tax § When the government finds it difficult to finance its spending through tax revenue or borrowing, it may choose to print money to pay for its spending. § Almost all hyperinflations start this way. § The revenue from printing money is the inflation tax Printing money causes inflation, reducing the value of money Consequently, inflation is like a tax on everyone who holds money – a transfer of resources from households to the government. LECTURE 12 THE COSTS OF INFLATION 5 The Fisher Effect § Recall the definition of the real interest rate: § So, this equation shows how the nominal interest rate is determined. Money supply growth determines the inflation rate. The real interest rate is determined by saving and investment in the loanable funds market. inflation rate real interest rate nominal interest rate + = § Rearrange: real interest rate nominal interest rate inflation rate + =
Background image of page 2
3 LECTURE 12 THE COSTS OF INFLATION 6 The Fisher Effect § In the long run, money is neutral, so a change in the money growth rate affects the inflation rate but not the real interest rate.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/02/2008 for the course ECON 102 taught by Professor Rossana during the Fall '08 term at University of Michigan.

Page1 / 8

Lecture+12 - Economics 102 Lecture 12: The Costs of...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online