EC102 Week6 Money
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Transcript of EC102 Week6 Money
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8/14/2019 EC102 Week6 Money
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Inflation ()
Inflation: measured in terms of changesin price index, spec the CPI
How do we compute inflation rate?How do we compute inflation rate?How do we compute inflation rate?How do we compute inflation rate?
Thru the CPI:
Two types of inflation (based on timeframe)
Short Term InflationShort Term InflationShort Term InflationShort Term Inflation
Increase in nominal MS
Increase in G,C, and I
Response to supply shocks (changes inprices of raw materials, changes in workerswage demands) Ex: Oil
Long Term InflationLong Term InflationLong Term InflationLong Term Inflation
Sustained rapid growth in MS
Costs of Inflation
Concern of households, business firms andConcern of households, business firms andConcern of households, business firms andConcern of households, business firms andpolicy makers implies that there are costs topolicy makers implies that there are costs topolicy makers implies that there are costs topolicy makers implies that there are costs tothe economy because of inflationthe economy because of inflationthe economy because of inflationthe economy because of inflation
Two Kinds: Expected and Unexpected InflationTwo Kinds: Expected and Unexpected InflationTwo Kinds: Expected and Unexpected InflationTwo Kinds: Expected and Unexpected Inflation
Expected Inflation
Inflation that is anticipated Example: If you hold PhP100 of currency in 2006
when inflation rate is 9%, you lost PhP9 of purchasingpower over the year
Costs of Expected Inflation Shoe leather CostShoe leather CostShoe leather CostShoe leather Cost
Cost to households and business firms ofmaking more trips to the banks to avoidholding significant amount of pesos orshifting funds from interest bearing assets
to money. Bracket CreepBracket CreepBracket CreepBracket Creep
Tax rate is defined in nominal terms, andindividual income tax is progressive andfully indexed against inflation
Example: Inflation also increases in wage,thus higher tax rates and higher prices
Who benefits? Corporations and lenders do.
Menu CostMenu CostMenu CostMenu Cost
Cost to firms because of changing prices(reprinting price list, informing customers0
Prices are not synchronized in the whole
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