CHAPTER 33

Inflation, Disinflation, and Deflation

PowerPoint® Slides by Can Erbil

© 2005 Worth Publishers, all rights reserved

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What you will learn in this chapter:

Why efforts to collect an inflation tax by printing money can lead to high rates of inflation

How high inflation can spiral into hyperinflation as the public tries to avoid paying the inflation tax

The economy-wide costs of inflation and disinflation, and the debate over the optimal rate of inflation

Why even moderate levels of inflation can be hard to end

Why deflation is a problem for economic policy

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Money and Prices

According to the classical model of the price level, the real quantity of money is always at its long-run equilibrium level.

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Money Supply Growth and Inflation in Brazil

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The Inflation Tax and HyperinflationThe inflation tax is the reduction in the real value of money held by the public caused by inflation, equal to the inflation rate times the money supply, on those who hold money.

The real value of resources captured by the government is reflected by the real inflation tax, the inflation rate times the real money supply.

A vicious circle of a shrinking real money supply and a rising rate of inflation, leads to hyperinflation and a fiscal crisis.

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Money and Prices in Brazil, 1985–1995

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The Fisher Effect

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The Costs of Inflation

Shoe-leather costs

Menu costs

Unit-of-account costs

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Inflation and Nominal Interest Rates in the U.S.

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The Great Disinflation of the 1980s

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Effects of DeflationEffects of Unexpected Deflation:

- Debt deflation

Effects of Expected Deflation:

- Zero bound

- Liquidity trap

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Japan’s Trap

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The End of Chapter 33

coming attraction:Chapter 35:

The Making of Modern Macroeconomics