宏观经济学课件：7 Causes of inflation.pptVIP

d. If the Fed wants inflation to be 10%, it will need to increase the money supply 15%. Thus M x V will rise 15%, causing P x Y to rise 15%, with a 10% increase in prices and a 5% rise in real GDP. a. If people need to hold less cash, the demand for money shifts to the left, because there will be less money demanded at any price level. b. If the Fed does not respond to this event, the shift to the left of the demand for money combined with no change in the supply of money leads to a decline in the value of money (1/P), which means the price level rises, as shown in Figure 1. c. If the Fed wants to keep the price level stable, it should reduce the money supply from S1 to S2 in Figure 2. This would cause the supply of money to shift to the left by the same amount that the demand for money shifted, resulting in no change in the value of money and the price level. 10. a. Unexpectedly high inflation helps the government by providing higher tax revenue and reducing the real value of outstanding government debt. b. Unexpectedly high inflation helps a homeowner with a fixed-rate mortgage because he pays a fixed nominal interest rate that was based on expected inflation, and thus pays a lower real interest rate than was expected. c. Unexpectedly high inflation hurts a union worker in the second year of a labor contract because the contract probably based the workers nominal wage on the expected inflation rate. As a result, the worker receives a lower-than-expected real wage. d. Unexpectedly high inflation hurts a college that has invested some of its endowment in government bonds because the higher inflation rate means the college is receiving a lower real interest rate than it had planned. (This assumes that the college did not purchase indexed Treasury bonds.) The Costs of Inflation Why inflation is bad? When there is inflation, things are more expensive. So inflation lowers living standards. Is it the true? Question : What has to happen in order to make your livi