Macro-economics
A Low and Stable Inflation Rate
Created by Ms. Theresia
start
Learning Objectives
By the end of this chapter you will be able to:
- explain the concept of inflation, disinflation, and deflation
- explain how inflation is measured
- calculate the rate of inflation using data (HL)
- discuss the problems in measuring inflation
- discuss the costs of inflation and deflation
- explain the causes of inflation
- explain and illustrate how government and central bank policies may be used to reduce inflation
- explain and illustrate the short-run Phillips curve (HL)
- explain and illustrate the long-run Phillips curve (HL)
- explain the concept of the natural rate of unemployment (HL)
- evaluate the extent to which there might be a trade-off between inflation and unemployment. (HL)
Index
CAUSES
INFLATION
REDUCING INFLATION
DEFLATION
DISINFLATION
CALCULATING
PHILLIPS-CURVE
How to measure
01
Concept of and the costs of
INFLATION
01
INFLATION
Why is the price getting more expensive?
01
Inflation is....
INFLATION
Inflation is a persistent increase in the average price level in the economy. It is usually measured through the calculation of a Consumer Price Index (CPI).
01
Costs of Inflation
Loss of purchasing power
If the inflation rate is 2%, it means that the average price of all goods and services has risen by 2%.
Effect on saving
If the inflation rate is higher than the interest rates given for savings account, then savings will be greatly affected.
Effect on interest rates
Commercial banks make their money from charging interest to people who borrow money from them.
01
Costs of Inflation
Effect on international competitiveness
If the country has a higher rate of inflation than that of its trading partners, then it will make its exports less competitive.
Uncertainty
Firms may be discouraged from investing due to the uncertainty associated with inflation.
Labor unrest
This may occur if workers do not feel that their wages and salaries are keeping up with inflation.
02
DEFLATION
Deflation is a persistent fall in the average price level in the economy. There are good deflation and bad deflation, depends on the result in the real output.
Bad Deflation
Good Deflation
Bad deflation occurs when there is a decrease in the level of AD.
Deflation is good if it comes from improvements in the supply side of the economy and/or increased productivity.
+ bad deflation
+ good deflation
Draw a Good Deflation and a Bad Deflation
Student Workpoint 18.1
Go to: whiteboard.fi Click "Join Class" and input the Room Code b8v8a or scan the QR Code
Do not confuse deflation with a falling rate of inflation, which is referred to as disinflation.
Deflation ≠ disinflation
Figure 18.1
Student workpoint 18.2
02
Costs of deflation
Unemploy-ment
Costs to debtors
Effect on investment
How is inflation measured?
Consumer Price Index (CPI)
03
How to calculate inflation
A representative basket of consumer goods and services is used to measure the price of this basket over time.
List typical goods and services consumed by average household
Change in the price of the basket is reflected in the measure called CPI
Prices of these items are calculated each month to calculate the change in price
The categories are given weight in the index
Group into different categories
The process of measuring inflation
Table 18.1 (UK CPI)
HL
Calculating Inflation
Inflation rate: Index for Year X - Index for year (X+1) Index for year X
x 100
HL
Calculating Inflation
Inflation rate: Index for Year X - Index for year (X+1) Index for year X
x 100
HL
Student Workpoint 18.9
Issues of Measuring Inflation
Measuring inflation using the CPI has one main limitation. The basket used represents the purchasing habits of a typical households.
Countries measure the rate of inflation in different ways and include different components.
There may be errors in the collection of data that limit the accuracy of the final results.
Prices may change for variety of reasons that are not sustained.
The CPI measures changes in consumer prices and is a very important indicator of an economy's health.
Items are removed or added to the consumer's basket to be more representative of the typical household demand.
Causes of inflation
Three main types of inflation
Inflation due to excess monetary growth
Cost-pulsh inflation
Demand-pull inflation
Demand-pull inflation
Demand-pull inflation occurs as a result of increasing AD in the economy.
Reasons:
- Higher consumers confidence
- Rising foreign incomes
- Increase in government spending
Cost-push inflation
Cost-push inflation is caused by an increase in the costs of production.
Reasons:
- Higher minimum wage requirements
- Change in the costs of domestic raw materials
- Increase in the costs of imported raw materials
Demand-pull inflation
Cost-push inflation
If
we
assume
that
the
economy
is
near
full
employment
then
the increase in AD results in an increase in demand-pull inflation as the price level rises. What may happen next?
Inflation due to excess monetary growth
Monetarists say that increases in the money supply result in higher AD.
Thank
you
A Low and Stable Inflation Rate
Theresia Lindha Widya Sari
Created on April 19, 2021
Section 2 - Macroeconomics
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Transcript
Macro-economics
A Low and Stable Inflation Rate
Created by Ms. Theresia
start
Learning Objectives
By the end of this chapter you will be able to:
Index
CAUSES
INFLATION
REDUCING INFLATION
DEFLATION
DISINFLATION
CALCULATING
PHILLIPS-CURVE
How to measure
01
Concept of and the costs of
INFLATION
01
INFLATION
Why is the price getting more expensive?
01
Inflation is....
INFLATION
Inflation is a persistent increase in the average price level in the economy. It is usually measured through the calculation of a Consumer Price Index (CPI).
01
Costs of Inflation
Loss of purchasing power
If the inflation rate is 2%, it means that the average price of all goods and services has risen by 2%.
Effect on saving
If the inflation rate is higher than the interest rates given for savings account, then savings will be greatly affected.
Effect on interest rates
Commercial banks make their money from charging interest to people who borrow money from them.
01
Costs of Inflation
Effect on international competitiveness
If the country has a higher rate of inflation than that of its trading partners, then it will make its exports less competitive.
Uncertainty
Firms may be discouraged from investing due to the uncertainty associated with inflation.
Labor unrest
This may occur if workers do not feel that their wages and salaries are keeping up with inflation.
02
DEFLATION
Deflation is a persistent fall in the average price level in the economy. There are good deflation and bad deflation, depends on the result in the real output.
Bad Deflation
Good Deflation
Bad deflation occurs when there is a decrease in the level of AD.
Deflation is good if it comes from improvements in the supply side of the economy and/or increased productivity.
+ bad deflation
+ good deflation
Draw a Good Deflation and a Bad Deflation
Student Workpoint 18.1
Go to: whiteboard.fi Click "Join Class" and input the Room Code b8v8a or scan the QR Code
Do not confuse deflation with a falling rate of inflation, which is referred to as disinflation.
Deflation ≠ disinflation
Figure 18.1
Student workpoint 18.2
02
Costs of deflation
Unemploy-ment
Costs to debtors
Effect on investment
How is inflation measured?
Consumer Price Index (CPI)
03
How to calculate inflation
A representative basket of consumer goods and services is used to measure the price of this basket over time.
List typical goods and services consumed by average household
Change in the price of the basket is reflected in the measure called CPI
Prices of these items are calculated each month to calculate the change in price
The categories are given weight in the index
Group into different categories
The process of measuring inflation
Table 18.1 (UK CPI)
HL
Calculating Inflation
Inflation rate: Index for Year X - Index for year (X+1) Index for year X
x 100
HL
Calculating Inflation
Inflation rate: Index for Year X - Index for year (X+1) Index for year X
x 100
HL
Student Workpoint 18.9
Issues of Measuring Inflation
Measuring inflation using the CPI has one main limitation. The basket used represents the purchasing habits of a typical households.
Countries measure the rate of inflation in different ways and include different components.
There may be errors in the collection of data that limit the accuracy of the final results.
Prices may change for variety of reasons that are not sustained.
The CPI measures changes in consumer prices and is a very important indicator of an economy's health.
Items are removed or added to the consumer's basket to be more representative of the typical household demand.
Causes of inflation
Three main types of inflation
Inflation due to excess monetary growth
Cost-pulsh inflation
Demand-pull inflation
Demand-pull inflation
Demand-pull inflation occurs as a result of increasing AD in the economy.
Reasons:
Cost-push inflation
Cost-push inflation is caused by an increase in the costs of production.
Reasons:
Demand-pull inflation
Cost-push inflation
If we assume that the economy is near full employment then the increase in AD results in an increase in demand-pull inflation as the price level rises. What may happen next?
Inflation due to excess monetary growth
Monetarists say that increases in the money supply result in higher AD.
Thank
you