ECON 102 1st Edition Lecture 30 Outline of Last Lecture 1 Money Demand Curve Shifts Cont 2 Money and Interest Rates a Money Supply Curve Outline of Current Lecture I II III Causes of Inflation Printing Money a Tax Seignorage Short Run Phillips Curve Current Lecture What are the causes of inflation Causes vary demanding on level of inflation o High inflation is always associated with rapid increase in MS o Moderate inflation has complex causes Classical model of the price level according to which the real quantity of money is always at its long run equilibrium level o Model was developed by economists before Keynes o Instantaneous changes in the price level According to the classical model of the price level the real quantity of money is always at its long run equilibrium level o EX Money Supply Growth and Inflation in Zimbabwe These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute What happens when nations decide to print money to finance expenditure o Erodes the value of real money supply The 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 To avoid paying the inflation tax people reduce their real money holdings and force the government to increase inflation to capture the same amount of real inflation tax Seignorage the difference between the value of money and the cost to produce and distribute it Seignorage Change in Money Supply Real Seignorage Change in Money Supply Price Level Real Seignorage Change in Money Supply Money Supply X Money Supply Price Level o In some cases this leads to a vicious circle of a shrinking real money supply and a rising rate of inflation The governments of wealthy politically stable countries like the United States and Britain don t find themselves forced to print money to pay their bills o Yet over the past 40 years both countries along with a number of other nations have experienced uncomfortable episodes of inflation o In the United States the inflation rate peaked at 13 at the beginning of the 1980s In Britain the inflation rate reached 26 in 1975 In the short run policies that produce a booming economy tend to also lead to a higher inflation and policies that reduce inflation tend to depress the economy o This creates both temptations and dilemmas for governments When actual aggregate output is equal to potential output the actual unemployment rate is equal to the natural rate of unemployment o When the output gap is positive an inflationary gap the unemployment rate is below the natural rate o When the output gap is negative a recessionary gap the unemployment rate is above the natural rate Short run Phillips Curve The short run Phillips curve is the negative short run relationship between unemployment and the inflation rate o A negative supply side shock shifts SRPC up o A positive supply side shock shifts SRPC down
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