Module 33 Types of Inflation Disinflation and Deflation

Module 33 Types of Inflation, Disinflation, and Deflation KRUGMAN'S MACROECONOMICS for AP* Margaret Ray and David Anderson

What you will learn in this Module: • 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 Money 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 Tax • Independent central banks issue fiat money • Monetizing the debt • Seignorage • Inflation Tax

The 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 Disinflation • Cost-push inflation • Demand-pull inflation • Politically motivated inflation • Disinflation? Former Federal Reserve Chairman, Alan Greenspan

The Output Gap and the Unemployment 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