ch4d - Seigniorage To spend more without raising taxes or...

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slide 0 CHAPTER 4 Money and Inflation Seigniorage To spend more without raising taxes or selling bonds, the govt can print money. The “revenue” raised from printing money is called seigniorage (pronounced SEEN-your-idge). The inflation tax : Printing money to raise revenue causes inflation. Inflation is like a tax on people who hold money.
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slide 1 CHAPTER 4 Money and Inflation Discussion question Why is inflation bad? What costs does inflation impose on society? Focus on the long run.
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slide 2 CHAPTER 4 Money and Inflation A common misperception Common misperception: inflation reduces real wages This is true only in the short run, when nominal wages are fixed by contracts. (Chap. 3) In the long run, the real wage is determined by labor supply and the marginal product of labor, not the price level or inflation rate. Consider the data…
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slide 3 The CPI and Average Hourly Earnings, 1965-2009 1965 = 100 Hourly wage in May 2009 dollars $0 $5 $10 $15 $20 0 100 200 300 400 500 600 700 800 900 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 CPI (1965 = 100) Nominal average hourly earnings, (1965 = 100) Real average hourly earnings in 2009 dollars, right scale
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slide 4 CHAPTER 4 Money and Inflation The classical view of inflation The classical view: A change in the price level is merely a change in the units of measurement. So why, then, is inflation a social problem?
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slide 5 CHAPTER 4 Money and Inflation The social costs of inflation …fall into two categories: 1. costs when inflation is expected 2. costs when inflation is different than people had expected
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slide 6 CHAPTER 4 Money and Inflation The costs of expected inflation: Imagine what happens if the inflation rate is 15%, but our nominal income also grows at 15%, and everybody knows this. Is inflation harmless in this case? Since everybody knows, the nominal interest rate will adjust so that your savings maintain the same purchasing power. But inflation still erodes the value of cash people will try to hold less of it. π i real money balances Real money demand goes down.
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slide 7 CHAPTER 4 Money and Inflation The costs of expected inflation: 1. Shoeleather cost def: the costs and inconveniences of reducing money balances to avoid the inflation tax. So, same monthly spending but lower average
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ch4d - Seigniorage To spend more without raising taxes or...

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