Implication people go out and buy even more before

Info icon This preview shows pages 6–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Implication: People go out and buy even more before price goes up even further. Business = P↑ Q d Self-fulfilling prophecy So long as people believe inflation is inevitable, it is indeed inevitable. President Nixon recognized this self-fulfilling prophecy, so, he reasoned, all he needed to do was convince people that prices would not be rising (further) in the near future. The Construction of the CPI The most important measure of inflation is the consumer price index. First a base year is picked, usually one ending with a 7. CPI c = Cost of living c x 100 Cost of living b ANTICIPATED AND UNANTICIPATED INFLATION Anticipated When inflation is fully anticipated, there are no winners or losers. The interest rate takes into account the expected rate of inflation. Without anticipated inflation, the interest rate would be around 5%. Nominal rate of interest = Real rate of interest + expected rate of interest. If the nominal rate of interest accurately reflects the inflation rate, then the inflation has been fully anticipated and no on wins or loses. COLA (cost of living adjustment clauses) agreement for many wage earners, social security beneficiaries, etc. Unanticipated Debtors (winner) in general, gain from unanticipated inflation because they repay their loans in inflated dollars. Creditors are not really the banks but people who put their money in banks, etc. paying a fixed rate of interest. Business owners also benefit or gain from unanticipated inflation through inventory price windfalls. Hurt: 1) people with fixed incomes, e.g. retired people 2) holders of long-term bonds, whether corporate or U.S. government bonds 3) those with fixed wages under long term contracts 4) land lords who have granted long-term leases at fixed rent
Image of page 6

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

View Full Document Right Arrow Icon
THEORIES OF THE CAUSES OF INFLATION Demand-pull Inflation Caused by excessive demand for goods and services. Too many dollars chasing too few goods – N.B economy is at full employment. Cost-push Inflation a) wage-price spiral Wages = 2/3 of cost of doing business, W↑ P↑ cost of living↑ wages↑ b) Profit-push inflation Oligopolistic industry: protect their rate margin by P↑ c) Supply-side cost shocks Oil prices shocks of 1973-74 INFLATION AS A PSYCHOLOGICAL PROCESS Causes Wars, deficits, Ms↑, P↑ of oil, etc. Middle process Labor unions; wages↑, business owner; P↑, consumers; D↑ To break the back of the inflationary psychology is to bring down the rate of inflation for a sufficiently long period of time so that people actually expect price stability to continue. CREEPING AND HYPERINFLATION Phillips Curve Tradeoff between inflation and unemployment. Most early explanations – labor markets – when unemployment is low, DL↑ wages↑ cost of production↑ P↑. GDP P AS AD 1 AD 2 AD 3
Image of page 7
The Misery Index Inflation rate + unemployment rate > 10 Phillips collected data in England from 1889-1959 rate of inflation and unemployment. Robert Solo and Paul Samuelson did the same in the 1970s 2 things the people do not like, if you want to ↑ one, you have to accept ↓ of the other. Unemployment Rate Inflation Rate Phillips Curve
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern