Unit 14
Inflation
Class preparation
Read Ch. 14 "Inflation"
Lecture outline
Inflation
Read Ch. 14 "Inflation"
Lecture outline
Inflation
- A sustained rise in the average price level
- Measured by Consumer Price Index (CPI)
- Elderly and those on fixed incomes
- Lenders - Banks, Savings & Loans, and Credit Unions
- Savers - people trying to save money for the future
- Consumers - anyone who has to buy items which are constantly going up in price
- Borrowers (including governments)
- Certain pension funds
- Uses a base period of 1982-1984 which averages "100"
- Measures a basket of goods used by the average urban household
- The CPI is used to determine Cost of Living Adjustments, and in all sorts of contracts and labor agreements
The CPI equation (see insert)
Causes of Inflation
Why would a Government want to cause inflation?
- Cost-push inflation = where the costs of making an item have increased
- Demand-pull inflation = where the demand for an item has increased faster than its production
- Money growth = where the government has simply printed too much money. "Too much money chasing too few items".
- Germany right after WW I is the classic 20th-Century example. Occurred 1922-1923. Britain and France imposed massive reparations on Germany after the war, plus the government owed money to its companies and arms suppliers. The German government (known as the Weimar Republic) resorted to printing its way out of debt, but destroyed the deutsche mark and the country in the process, ultimately leading to the rise of Adolf Hitler and the Nazi party.
- Zimbabwe in the early 2000's is the most-recent example of hyperinflation. During this period, the country was run by Robert Mugabe, a Communist thug and dictator, who financed his wars of genocide against neighboring African nations by printing money and lying about it to international authorities. Zimbabwe has basically been destroyed. The per capita GDP of Zimbabwe is only $900 per year.
- Other examples: Almost all the large nations of South America have had periods of hyperinflation, the classic examples being Argentina and Chile.
Why would a Government want to cause inflation?
- If a government is in debt, increasing the money supply makes it easier to pay its debt down.
- Printing money, either electronically or physically, is easier than increasing taxes on its citizens. Inflation is a hidden tax. It's a sneaky way to finance a government without actually raising income taxes.
Homework
| 14._economist_thomas_sowell_assignment.docx |
| 14._inflation_homework_questions.docx |