Chapter 16 Summary

Chapter 16 Summary - Chapter 16 Summary - In analyzing high...

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Chapter 16 Summary - In analyzing high inflation, economists use classical model of the price level, which says that changes in the money supply lead to proportional changes in the aggregate price level even in the short run. - Governments sometimes print money in order to finance budget deficits. When they do, they impose an inflation tax, generating tax revenue equal to the inflation rate times the money supply, on those who hold money. Revenue from the real inflation tax, the inflation rate times the real money supply, is the real value of resources captured by the government. In order to avoid paying the inflation tax, people reduce their real money holdings and force the government to increase inflation to capture the same amount of real inflation tax revenue. In some cases, this leads to a vicious circle of shrinking real money supply and a rising rate of inflation, leading to hyperinflation and a fiscal crisis.
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