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Inflation

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									Inflation

Economics 120
Inflation
 Inflation – sustained rise in the general
  price level or a fall in the purchasing power
  of money
 Deflation – decrease in the general price
  level (Great Depression in 1930s)
Three Types

Creeping Inflation
Galloping Inflation
Hyperinflation
Creeping Inflation
   Inflation that moves slowly and steadily (1%–4%
    annually).
   Most people consider inflation to be an evil
    concept, but most economists believe that an
    annual rate of inflation of 1%–4% is not only
    good, but also necessary to allow for economic
    growth and an expanding population
    (advantage); however, it must be carefully
    controlled (disadvantage).
Galloping Inflation
 This occurs when inflation starts to get out
  of control. (10%, 15% . . .)
 The value of the dollar drops more quickly
  and prices double faster.
 The last time this occurred in Canada was
  during the mid-1970s to early 1980s.
Hyperinflation
   Inflation that is out of control (>50% per month)
       prices double quickly
       money becomes useless
       monetary system is likely to be destroyed
       economic system becomes chaotic.
   This occurs when a population loses all faith in the
    economic system.
   If serious inflation becomes a major problem, some
    governments will simply print more money to cover the
    higher prices which causes inflation to rise even more
    rapidly.
Hyperinflation
   The most famous case occurred in Germany, in
    the years following World War I.
   Inflation began in 1919 and by November of
    1923, prices had risen to 1 422 900 000 000
    times what they had been in 1914.
   The government introduced a new currency that
    required 1 trillion units of old money for 1 unit of
    the new.
   In recent years (1980s), Israel, Argentina and
    Bolivia have all suffered hyperinflation.
Hyperinflation
   Germany in 1923 when the rate of inflation hit 3.25 × 106
    percent per month (prices double every two days).
   Greece in 1941-1944, when the rate of inflation hit 8.55
    × 109 percent per month (prices double every 28 hours).
   Yugoslavia's rate of inflation hit 5 × 1015 percent inflation
    between 1 October 1993 and 24 January 1994 (prices
    double every 16 hours).
   The most severe known incident of inflation was in
    Hungary after the end of World War II, peaking at 4.19 ×
    1016 percent per month (prices double every 15 hours).
               100 Billion                       500 Billion
             Germany, 1923                    Yugoslavia, 1993




1 Milliard (1,000,000,000,000,000,000,000 )
                 1 x 1021
              Hungary, 1946
Zimbabwe
Timeline
 March 2007 – monthly inflation passed to
  50% mark (hyperinflation)
 December 2008 – inflation hit 6.5
  quindecillion novemdecillion percent - 65
  followed by 107 zeros. (Prices double
  every 24.7 hours)
 January 2009 – issued a 1 trillion dollar
  banknote
 Built in expiry date
 Worth 2 loaves of bread
Two Causes

Demand-Pull
Cost-Push
Demand Pull
   Demand-pull inflation happens when people's
    incomes rise, but the amount of goods and
    services in the marketplace remain the same.
   Since people have more money to spend, they
    are willing to pay more for goods and services.
    In other words, the total demand will go up,
    which will cause prices to rise.
   Demand-pull inflation has been described as
    "more money chasing the same amount of
    goods."
Demand-Pull
   Demand-pull Inflation can be represented
    by the equation MV=PQ.
    M   is the amount of money available to spend,
     V is the velocity that the money is spent at, in
      other words how many times one dollar is
      spent as it circulates through the economy,
     P is the price of an item,
     Q is the quantity of items available in the
      marketplace.
Demand-Pull
 If M rises, then mathematically either the
  prices (P) must rise, or the amount of
  goods (Q) must rise, or the velocity of
  spending (V) must go down.
 If the money supply increases, and the
  amount of goods and the velocity of
  spending stay the same, prices will go up.
Cost-Push
   Prices rise as a result of increased production costs.
   Labour costs generally make up the largest portion of the
    cost of production of most goods and services.
   In trying to improve their standard of living or to protect
    themselves from expected inflation, workers will demand
    higher rates of pay, causing the production costs to rise
    and thus creating a form of inflation.
Inflation
   In general, inflation hurts people.
   When prices rise, people can't buy as many things with
    their money.
    People on a fixed income (an income that doesn't
    increase when the cost of living goes up) are especially
    hurt, since the things they need to survive have
    increased in price, but their incomes don't increase.
   Businesses are hurt, since they can't invest as much in
    the business, and it's difficult to plan for the future if you
    don't know what the value of the dollar will be.
Inflation
   Some people are helped, however, and those
    people helped are people in debt (people who
    owe money).
   If someone borrows money, and inflation causes
    the value of money to go down, then the money
    they pay back won't be worth as much as when
    they borrowed it. They essentially are paying
    less money back then they borrowed.

								
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