Economics for Leaders Money & Inflation Economics for Leaders Butterfingers.

Economics for Leaders


Money & Inflation


Butterfingers


Inflation

A general, sustained increase in the price level

OrA decline in purchasing power


How is Inflation measured?

Market basket of goods and services compared over time

Consumer Price IndexConsumer Price Index


Same Products – Higher Prices


Inflation

What’s the problem?

Price Stability!

Certainty vs. Uncertainty


Which would you rather have?


Hyperinflation in Zimbabwe

A Zimbabwean friend who runs a business recently told me, “If you don’t get a bill collected in 48 hours, it isn’t worth collecting, because it is worthless. Whenever we get money, we must immediately spend it, just go and buy what we can. Our pension was destroyed ages ago. None of us have any savings left.” http://davidcoltart.com/archive/2008/376 “Dying Silently in Zimbabwe,” by Michael Gerson, Washington Post, Feb 20, 2008


HARARE, April 25,2006 — How bad is inflation in Zimbabwe? Well, consider this: at a supermarket near the center of this tatterdemalion capital, toilet paper costs $417.No, not per roll. Four hundred seventeen Zimbabwean dollars is the value of a single two-ply sheet. A roll costs $145,750 — in American currency, about 69 cents.The price of toilet paper, like everything else here, soars almost daily, spawning jokes about an impending better use for Zimbabwe's $500 bill, now the smallest in circulation.


Lunch for 8 people costs a diner 6 million Zimbabwean dollars (about $18 U.S.)


What Causes Inflation ?

All periods of significant sustained inflation have been accompanied by

increases in the money supply


Money Supply (M1)

Coin +Currency 23%

Checkable Deposits 77%


Creation of Money


Federal Reserve System (FED)

12 DistrictsMember banksDistrict chairpersons and boardsFederal Reserve Chairman and boardOpen Market committee


Federal Reserve System


Manage the Money Supply

to Avoid Inflation: The

Job of the Federal Reserve System

“All periods of significant sustained inflation have been

accompanied by increases in the money supply.”


Tools of the FED

Reserve requirementDiscount rate

Open market operations


Money Supply and Interest Rates

Demanders + Suppliers = Price


Interest Rate=Price of Money

Prices (and interest rates) are set by the market—not by the FED.

Producers influence price through the quantity of goods.

The FED influences interest rates (the price of money) through the quantity of money.


Who is watching over the Economy?

What will the future hold?

Economics for Leaders Money & Inflation Economics for Leaders Butterfingers.

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