Money supply inflation
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Transcript of Money supply inflation
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Short QuizName the type of unemployment
(F = frictional, C = Cyclical, S = Structural)
1. Recent college graduates
2. Former Myspace employees
3. Waitress laid off because of fewer customers4. Calculate the unemployment rate of Travistan:
30 million people in labor force
3 million discouraged workers
10 million unemployed and looking for work
5. Calculate the GDP of Travistan in billions
Black Market = $ 10 Consumer spending = $15 Investment = $6Government = $4 Imports = $10 Exports = $5
6. Calculate Travistan’s GDP per capita if there are 20 million citizens
20 million = .02 billion 7. Is this a rich or poor country?
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Definition of money
• Medium of exchange
• Unit of Accounting
• Store of Value
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MoneyCommodity money
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Currency
Rome
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Currency
Ancient China
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Currency
RepresentativeCurrency
Advantages?Disadvantages?
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Currency
FiatCurrency
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Currency
FiatCurrency
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Currency
FiatCurrency
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Currency
FiatCurrency
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CurrencyFiatCurrency
Advantages?Disadvantages?
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The Euro conversion to US 1.50
Fiat CurrencyAdvantagesDisadvantages?
US/Mex/Can?
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Foreign exchanges
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Near Money
• Debit cards
• Gift Cards
• Financial Assets
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Inflation• Rise in
prices over time
• “cost of living”
• “The real value of currency”
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GDP
• GDP = C + I + G + (Exports – Imports)
• Which one is affected by inflation?
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Why does inflation happen?
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Zimbabwe
Population:
13 million
GDP: 4.72 billion
GDP/Capita:
$402
Unemployment:
66%
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Your G3 is advising the President of Zimbabwe on how to improve the economy of his country.
Situation: Many blacks can not afford goods and food in the markets. Business owners are allowed to charge whatever
price they want and since food is hard to find, its very expensive.
Local Zimbabwe businesses have a difficult time competing with imports from the USA, South Africa and England. When
Zimbabwe businesses fail, people lose their jobs causing more unemployment.
98% of the farm land is owned by white farmers, which was taken in the 1800’s from native Africans. 90% of this country is black and has no access to this farm land. The white farmers
pay low wages and often do not hire native blacks.Many people in Zimbabwe do not have much money to buy
food with. The Zimbabwe dollar is a strong currency which is difficult to get much of because the central bank doesn’t print
very much.
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Zimbabwe
Fixed prices
Banned imports
Redistributed land
Printed up more money
CAUSE EFFECTPresident Robert Mugabe
shortages
More shortages
Still more shortages
inflation
Technically “hyperinflation”
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What if I told you?
• Million dollars?
• 25 Billion dollars?
• 100 Billion dollars
• Fiat currency = value only because we think it does
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Why can’t we just print more money?
• Quantity theory of inflation
Piles of currency in Zimbabwe
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Hyperinflation in Zimbabwe
• Start of 2008– 100 % inflation
• End of 2008-2009– 10,000,000 %!!– 10 X 6th inflation
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What else causes inflation?
• Cost push theory
• Demand pull theory
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Brainstorm 5 things a typical family would buy in a month
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Inflation• Rise in prices over
time
• “cost of living”
• Calculate using Consumer Price Index
• CPI =New Prices – Old Prices
Old PricesX 100
Always a percentage, But unlike unemployment rate,It can be more than 100, or a negative
1-3 % inflation = normal
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Who likes inflation?• Retirees
• Consumers
• Lenders on fixed interest rates
• Borrowers on fixed interest rates
• Sales people
• Real estate agents
• College students
• Doctors
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Sony PS3 Price change %
• Gas in 2009: $2.50
• 2011: $3.20
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Inflation calculator
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If I buy 20 Gallons of gas per week
• At $1/Gallon
• At $2/Gallon
• At $3/Gallon
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Recently though
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Calculate CPI
Housing 100Transportation 20Food 50Energy 15Medical Care 5Apparel 10
Total: 200
Housing 115Transportation 25Food 55Energy 45Medical Care 10Apparel 15
Total: 265
Slovenia 2006, in Euros Slovenia 2008, in Euros
CPI current year – CPI base year
CPI base year
INFLATION= RATE
265 - 200200 (2006)
SO 100 = 32.5%
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You try one
4. Calculate the US inflation rate
5. Is this a good rate or should we be worried?
6. What is deflation and why is it good?
7. Do you think fiat currency is better for a country than representative currency? Explain.
Housing 700Transportation 300Food 100Energy 45Medical Care 45Apparel 100
Total: 1290
Housing 690Transportation 310Food 120Energy 90Medical Care 45Apparel 95
Total: 1350
United States 2006, in $$$$ United States 2008, in $$$$