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Nov 05 Note - Why is inflation bad for the economy.docx

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Hannah Holmes

Why is inflation bad for the economy? (Ch 11) 05/11/2008 Why is inflation bad for the economy? Inflation tax - There are 3 ways for a government to raise revenue 1) Direct tax 2) Borrowing – future tax 3) Printing money – tax on money - Inflation can be seen as a tax on our own money holding Hyperinflation – inflation that exceeds 50% per month Example: a large cup of coffee at Tim Horton’s costs $1.99 After one year a cup of coffee cost $181.35 - You can’t make decisions when you have hyperinflation - Economy does not function with high rate of inflation Fisher effect – the one for one adjustment of the nominal interest rate to the inflation rate - Nominal interest rate = real interest rate + inflation rate - In the long run, a change in money growth does not affect the real interest rate Cost of inflation - Shoeleather costs o BeforeATM and online banking o When you have high inflation, you have to walk to the bank to change you money o The time we have spend - Menu costs o Arestaurant in a high inflation need to constant change their menu 1 Why is inflation bad for the economy? (Ch 11) 05/11/2008
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