ModuleTypes ofInflation, Disinflation,and Deflation

KRUGMAN'SMACROECONOMICS for AP*

33

Margaret Ray and David Anderson

What you will learnWhat you will learn

in thisin this ModuleModule::

• The classical model of the price level

• Why efforts to collect an inflation tax by printing money can lead to high rates of inflation and even hyperinflation

• The types of inflation: cost-push and demand-pull

The Classical Model of MoneyThe Classical Model of Money and Prices and Prices

• %∆ M = %∆ PL

• Classical Model of the Price Level (E to E’’)...Good assumption given high inflation

•Classical Model ignores short-run changes ( E to E’)... Poor assumption given low inflation.

The Inflation TaxThe Inflation Tax

•Independent central banks issue fiat money

•Monetizing the debt

•Seignorage

•Inflation Tax

The Logic of HyperinflationThe Logic of Hyperinflation

•Impact of inflation tax on people’s decision to hold money

•Why print large sums of money?

•Taxi analogy

•Substituting commodities for currency

Moderate Inflation and Moderate Inflation and DisinflationDisinflation

• Cost-push inflation

• Demand-pull inflation

• Politically motivated

inflation

• Disinflation?Former Federal Reserve Chairman, Alan

Greenspan

The Output Gap and the The Output Gap and the Unemployment RateUnemployment Rate

•Output Gap

•Actual Output = Potential Output .: Actual Unemployment = Natural Rate of Unemployment

•Actual Output > Potential Output .: Actual Unemployment < Natural Rate of Unemployment

•Actual Output < Potential Output .: Actual Unemployment > Natural Rate of Unemployment