ECON100 Lecture Notes - Lecture 6: Money Illusion, Menu Cost, Hyperinflation
15 Jun 2016
School
Department
Course
Professor
Why Inflation and Deflation are problems?
-Low/stead/anticipated is not a problem
-Unpredictable inflation or period of deflation is a problem
• Redistributes income and wealth
• Lowers real GDP and employment
!
Costs of Expected Inflation (aka TAX ON MONEY HOLDING)
• Shoe-leather cost
◦Time cost due to reducing money holding due to inflation
• Menu cost
◦Restaurants gotta print dat new menu, reprint advertising
things, relabeling pricetaaags
• Tax distortions
◦Failure for tax rate to index the inflation
• Money illusion
◦The cost of living
Benefits of inflation
• 1% cut in nominal wage in a zero-inflation economy = 1% raise in
nominal wage in a 2% inflation economy
• "Greases the wheels" of the labor market
!
Hyperinflation
• Extreme rise in prices at a rate of more than 50% per month
• AKA zimbabwe
!
Consumer Price Index
• CPI measure the average prices paid by urban consumers for a
fixed basket of consumer goods and services
• Calculate CPI by
• Inflation rate:
!
!
!
!
!
• CPI might overstate the true inflation rate for 4 reasons:
◦Commodity substitution bias
◦New goods bias
◦Quality change bias (new cars vs old cars)
find more resources at oneclass.com
find more resources at oneclass.com
