文档介绍：Intermediate Macroeconomics
Lecture 5
Inflation
Definition
Inflation: The overall increase in prices
Hyperinflation: extraordinary high inflation
Real . Nominal Interest Rate
The Fisher equation
r: real interest rate
i: nominal interest rate
: inflation rate
Nominal interest rate can change because of the change in the real interest rate or/and the inflation rate
Nominal Interest Rate
The quantity theory + the Fisher equation
An increase in the rate of money growth of 1% causes a 1% increase in the rate of inflation; then a 1% increase in the rate of inflation in turn causes a 1% increase in the nominal interest rate
This one-for-one relation between the inflation rate and the nominal interest rate is called the Fisher effect. (one-for-one refers to %, not its value)
Ex Ante . Ex Post
If there is a rumor that the oil price will go up further due to possible OPEC limitation of production, what will happen?
Demand for Money
The cost of holding money
Do not earn interest
Pay the cost for possible inflation
So, the cost of holding money is
The Demand for Money
How To Stop a Hyperinflation
If the quantity theory pletely true
where
i did not affect money demand
stabilize money supple = stabilize P
How To Stop a Hyperinflation
However, if the Fisher effect holds
is the cost for holding money
stabilize money supply makes
increases
since M is stable, must be that p ↓
deflation
↓
How To Stop a Hyperinflation
What is the path to get to the end of hyperinflation without causing deflation?
P
i
M/P
M
0
r
Time
End of inflation