I.

Overview of inflation
e

Inflation : sustained increase in the

general price level of goods in an
economy over a period of time ( increase month over

month ) reduction of purchasing power per unit of ( $1 buy fewer )

=
money

deflation : contrary ↑
.

>< decrease price level time purchasing

-

over →
power

Definition &
computing method
.
_

CPI choose a base with price

:
year
UP It CPIᵗ -1
-1ft
_

= .
100.1 .

multiply goods basket with base price

CPIt
-1
CPI of each
year

classification

moderate inflation -

the most ideal condition / better than deflation

inflation rate
-

10.1 .

increases
slowly
-

price
because price ↑
higher
•
profit firms
-

spur production
•
can increase
quantity

galloping inflation
01 .
101 .
100.1 .

rate from
'
10 / 99.1
'
-

.
.

deflation moderate hyper

destroy the
galloping
-

economy
inflation inflation inflation

hyperinflation
inflation exceeds
•

1001 .

totally destroy
-

the
economy

causes of inflation

5th
demand -

pull inflation cost push inflation

P SAAS
P SRAS ,

11 AD

/ Y
AD

AD shifts right ( ) SRAS shifts left ( )

'

specific
-
courses
specific causes

↑
price level inflation ↑ price level
'
↑
•
↑ inflation
'
•

output Y ↑ ↓ ↑
unemployment
•

unemployment
- -

output ↓ •
 LR
LRAS

P the
usually shift
right trend of
-
in
long run LRAS
upward economy
•

output ↑
-
•

TD shifts right more than demand

goods than of
LRAS
capacity
'
more
economy
•

the level ↑
producing goods of economy price inflation in LR
• •

AD

Money quantity theory ( ultimate course of inflation in the LR -

printing too much

money)
M .
V = P .
Y

Y all
goods
'

: 10 if V = 2 only need M = 25 to
buy 10
goods
M V
P $5 each
-
:
.
P =
.

Y
M of
-
:
quantity money
V
velocity of how round / ( round circulate out then back to
my wallet
•
comes
money :
many year
time to
money money goes
-
: :

{
V P M
in the SR V fluctuates do not about
depends
-

, care → on

in the LR , V is more stable

T

change of M
change of Y P
unchanged
'
= •

change of M
change of Y deflation
•
<

change
•
of of
M 7
change Y inflation

I. Phillips curve relationship between inflation &

unemployment
Phillips
'

shows the short trade off between inflation

curve run &
unemployment
-

ADI than ADL ADS price level 12%46%1

'
> ADL price level increases less >
*

"
" ""
" •
Short have negative relationship
'

inflation rate & rate

run
unemployment
^
"
↑ have accept the trade off inflation
'

high unemployment
"
rate
¥
)
: to
high rate or

12000 ; ; ;

LRAS is stable
changing price level
'
> output does not change when

there OH
Long &
unemployment
'

rww is no trade between inflation rate

always stays natural rate

•

unemployment rate at curve is vertical

•

The shift of Phillips curve

short rww

{
AD SRAS As remains
P
'

r move
along : the same P curve but economy changes AD shifts
I

originally
or
'

changes if
you want to shift SRAS , keep AD Wh .

shift also leads Phillips

-
however , the As to SR curve shift

shifts
if SRAS
right ☒ Y ↑ P ↓ "
shift left ( trade off cheaper /
'
, SRPC

if shift left SRPC shift

right ( trade OH expensive)
A P ↑
SRAS
'
Y ↓ ,
more

Y I cost
push inflation )
 I rate

shifts left
-
SRPC →
the same output has less inflation rate

the same output has

-

SRPC shifts right → more inflation rate

urate

↳ rWN long
Ng
: there is no shift of LRPC in the run