24. Inflation, Disinflation, and Deflation. Инфляция, Дизинфляция и Дефляция.

Inflation - increase of average price level in the economy. In analyzing high inflation, economists say that change in the M^S lead to the proportional changes in the aggregate price level in short run.

Governments sometimes print money in order to decresase real value of the governmental debt. When they do, they impose an inflation tax on those who hold money. 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.

D emand-pull inflation: AD increase – P level increase. Factors influencing upward shift of AD curve: increase in C, I, G, Xn, M^S. Other factors: change in wealth, positive expectations, implementation of monetary/fiscal policy.

Cost-push inflation: SRAS decreases – P level increase. Factors influencing upward shift of SRAS: change in commodity prices, salary increase, productivity decrease.

Expected inflation: Yreal=Ynom/P level=Ynom/(1+Пe), where Пe-expected inflation. Unanticipated inflation: enriches some of economic participants due to the losses of the other party. Ex: making loans – bank loses.

Moderate inflation: causing factors - M^S & AD increases, negative shocks, stimulating policies

Hyperinflation: causing factor – M^S increase. Stagflation - a situation where an inflation rate is high, the economic growth rate slows down, and unemployment remains steadily high.

Measuring inflation: a number of goods are put into a "market basket." The cost of this basket is then compared over time. This results in a price index, which is the cost of the market basket today as a percentage of the cost of that identical basket in the base year.

Disinflation is a decrease in the rate of inflation – a slowdown in the rate of increase of the general price level of goods and services in a nation's gross domestic product over time. Disinflation occurs when the increase in the “consumer price level” slows down from the previous period when the prices were rising. Disinflation is the reduction in the general price level in the economy, but for a short period of time. Disinflation takes place only when an economy is suffering from recession. For example, disinflation occurs when the inflation rate goes from 5% to 2%.

Deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the real value of money over time; conversely, deflation increases the real value of money. Economists generally believe that deflation is a problem in a modern economy because it increases the real value of debt, and may aggravate recessions and lead to a deflationary spiral (situation where decreases in price lead to lower production, which in turn leads to lower wages and demand, which leads to further decreases in price). When this happens, the economy enters a liquidity trap (situation in which nominal interest rates cannot fall below the zero bound), rendering conventional monetary policy ineffective.