Economics 100B - 25 (4-17-2007)

Economics 100B - 25 (4-17-2007) - Economics 100B Professor...

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Professor Steven Wood 4/17/07 Lecture 25 ASUC Lecture Notes Online (formerly Black Lightning) is the only authorized note-taking service at UC Berkeley. Please do not share, copy or illegally distribute these notes. Our non-profit, student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. Sharing or copying these notes is illegal and could end note taking for this course LECTURE The last few weeks we have been discussing international trade and currency. This week we will be discussing inflation and will develop another model to help us explain its effects. This is closely related to the IS- LM model so please review it for the following lectures. Definition of Inflation Π is used to represent inflation. Π t = [(Pt – Pt-1)/Pt-1 ]* 100 Inflation is a time variable. During the last 45 years, inflation seemed to have two distinct periods. Until the mid-80s, inflation seemed to be climbing. Afterwards, it declined considerably and stayed fairly constant. Inflation is a sustained rise in the general price level. Accelerated Inflation is a period where we have a rising inflation rate. Disinflation is a slowing inflation rate. Prices are still rising, just at a slower pace. Deflation is a sustained fall in the general price level. These periods are very rare. The last time this occurred was in the 1930s. Hyperinflation is an inflation rate of 50% or more per month. Costs of Inflation Inflation can be either: 1) Anticipated, or 2) Unanticipated or incorrectly anticipated. There are very different consequences to these two types of inflations. As long as inflation meets our expectations, we can account for them in our contracts and agreements. Unanticipated inflation is the one that can harm companies and individuals. There are four main costs to inflation: 1) Arbitrary redistribution of income. 2) Information and uncertainty costs. High rates of inflation reduce the amount of information held by prices. 3) Institutional and constitutional costs. This degrades our faith in the government. 4) Shoe-leather and menu costs are resource misallocations due to inflation. Arbitrary Redistribution of Income
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Economics 100B - 25 (4-17-2007) - Economics 100B Professor...

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