Chapter 30
Money Growth
and Inflation
1. Inflation and its Forms
table of 2. Classical Theory of Inflation
contents 3. Monetary Policy and Inflation
4. Hyperinflation Case Studies
5. Costs of Inflation
6. Inflation and Wealth Redistribution
7. The Costs of Hyperinflation
8. Deflation and Its Risks
9. Discussion
10. Conclusion
1. Inflation and its Forms
Inflation is the increase in the overall price level.
Deflation is the decrease in price levels.
Hyperinflation is extremely high inflation, sometimes
exceeding 50% per month.
2. Classical Theory
of Inflation
Quantity Theory of Money
MM = money supply
VV = velocity of money (how
M×V=P×Y fast
PP =
money circulates),
price level,
YY = real output (real GDP).
If the money supply (M) increases without a corresponding
increase in output (Y), the price level (P) must rise
=> INFLATION
3. Saving for
Monetary Policy and Inflation
MONETARY INJECTION
When the Federal Reserve or any central bank increases the money
supply, it shifts the money supply curve to the right.
Effect: The increased supply of money leads to a decrease in its value,
causing inflation (prices rise).
Example: If the Fed prints more money or purchases bonds, the money
supply increases, leading to higher inflation, assuming the output does
not increase correspondingly
3. Saving for
Monetary Policy and Inflation
CLASSICAL DICHOTOMY
The Classical Dichotomy refers to the separation of nominal
variables from real variables.
In the long run, changes in the money supply affect only
nominal variables (prices, wages), but not real variables
(output, employment), a principle known as monetary neutrality.
4. Effects of a
Monetary Injection
If the Fed prints more money or increases
the money supply, the price level increases
INFLATION
Money Supply and Price Level
4. Effects of a
Monetary Injection
With the increase in money supply, demand for
goods and services increases in the short term
higher prices
Adjustment Process
5. Hyperinflation
Case Studies
Germany (1920s): the
government printed vast
amounts of money to pay for
World War I reparations
=> inflation surged, and the
price of everyday goods
skyrocketed.
5. Hyperinflation
Case Studies
Zimbabwe (2008): Hyperinflation in
Zimbabwe reached a staggering
24,000% in 2008, driven by
excessive money printing by the
government to fund public spending.
Shoeleather Costs Menu Costs
Increased transactions as Businesses incur costs for
people reduce cash holdings frequent price changes
6. The Costs of Inflation
Relative-Price Inflation-Induced
Variability Tax Distortions
Inflation distorts price Increased transactions as
signals, causing inefficiency people reduce cash holdings
Inflation Tax Fisher Effect
The hidden tax Nominal interest rates
caused by rise with inflation,
inflation reducing but real interest rates
money's value remain unchanged
7. Inflation Tax & Fisher Effect
8. Costs of
Hyperinflation
& Deflation
Hyperinflation: Destroys savings, disrupts the
economy, and erodes confidence in currency.
Deflation: Leads to stagnation, higher debt
burdens, and reduced spending.
9. Discussion
What are the long-term
effects of monetary
policy on inflation?
9. Discussion
How does inflation
affect your daily life?
9. Discussion
You are a financial advisor, and a client in their
mid-50s is concerned about inflation affecting
their retirement savings. They have most of their
savings in a low-interest savings account. What
advice would you give to help protect their wealth
from inflation over the next 10 years?
10. Conclusion
Inflation arises from increased money supply,
but hyperinflation is extremely damaging
Central banks must balance money
supply to maintain stability
Thank You