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Unformatted text preview: >> H O U R LY WAG E S What you will learn in this chapter: ➤ Why efforts to collect an infla- tion tax by printing money can lead to high rates of inflation ➤ How high inflation can spiral into hyperinflation as the public tries to avoid paying the inflation tax ➤ The economy-wide costs of infla- tion and disinflation, and the debate over the optimal rate of inflation ➤ Why even moderate levels of in- flation can be hard to end ➤ Why deflation is a problem for economic policy and leads policy makers to prefer a low but posi- tive inflation rate chapter 793 33 that economists use as a rough dividing line between merely high inflation and hyperinfla- tion . Yet Brazil’s experience was actually quite mild compared with history’s most famous example of hyperinflation, which took place Inflation, Disinflation, and Deflation 3,000% 2,500 2,000 1,500 1,000 500 Inflation rate Year 1 9 8 1 9 8 5 1 9 9 1 9 9 5 2 2 4 Source: International Monetary Fund. N MODERN AMERICA, WE COMPLAIN about inflation when the overall level of prices rises a few percent over the course of a year. But those who lived through the late 1970s scoff—they remember when prices rose as much as 13% in a year. And in other times and places, in- flation has gone much, much higher. For example, the accompanying figure shows the inflation rate in Brazil from 1980 to 2004. As you can see, there were many years when the Brazil- ian inflation rate was in triple digits—and even years when it went into four dig- its. For a sense of what it felt like to be a Brazilian con- sumer during this period, consider what happens to the price of a gallon of gas over the course of a year at an inflation rate of 3,000%, equal to Brazil’s inflation rate in 1990. At that rate, a gallon of gas that cost $3 at the beginning of the year would cost $90 by the end of the year. In some months, infla- tion in Brazil briefly reached the 50%-per-month level You call what we’ve seen in the United States inflation? As shown in the graph above, between 1985 and 1995 Brazil demonstrated what really serious inflation—up to almost 3,000% per year—looks like. In 1992, hoping for relief, Brazilians were out on the street demanding new leadership. I Carrion Carlos/ Corbis Sygma Brazilian Inflation Rate, 1980–2004 793-814_CH33_Econ.qxp 11/1/05 3:47 PM Page 793 794 PA R T 1 4 THE SUPPLY-SIDE AND THE MEDIUM RUN Money and Inflation Even though inflation in the United States is much lower today than it was during the 1970s—and a far cry from the recent experience of Brazil—the American public and media still pay close attention to inflation. Ask any American to name some seri- ous problems that an economy faces and chances are you’ll hear the word inflation....
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