Macro Economics Presentation
WHAT IS INFLATION?
INFLATION IS THE LONG TERM RISE IN THE PRICES OF
GOODS AND SERVICES CAUSED BY THE DEVALUATION
OF CURRENCY.
CAUSES OF INFLATION:
• So what exactly causes inflation in an economy? There is not
a single, agreed-upon answer, but there are a variety of theories, all of which play some role in inflation:
1. THE MONEY SUPPLY
• Inflation is primarily caused by an increase in the money supply that outpaces economic growth.
• Ever since industrialized nations moved away from the gold standard during the past century,
the value of money is determined by the amount of currency that is in circulation and the public’s perception of the value of that money. When the Federal Reserve decides to put more money into circulation at a rate higher than the economy’s growth rate, the value of money can fall because of the changing public perception of the value of the underlying currency. As a result, this devaluation will force prices to rise due to the fact that each unit of currency is now worth less.
• One way of looking at the money supply effect on inflation is the same way collectors value
items. The rarer a specific item is, the more valuable it must be. The same logic works for currency; the less currency there is in the money supply, the more valuable that currency will be. When a government decides to print new currency, they essentially water down the value of the money already in circulation. A more macroeconomic way of looking at the negative effects of an increased money supply is that there will be more dollars chasing the same amount of goods in an economy, which will inevitably lead to increased demand and therefore higher prices. 2. THE NATIONAL DEBT
• We all know that high national debt in the U.S. is a bad thing, but did you know that it can actually drive inflation to higher levels over time? The reason for this is that as a country’s debt increases, the government has two options: they can either raise taxes or print more money to pay
INFLATION IS THE LONG TERM RISE IN THE PRICES OF
GOODS AND SERVICES CAUSED BY THE DEVALUATION
OF CURRENCY.
CAUSES OF INFLATION:
• So what exactly causes inflation in an economy? There is not
a single, agreed-upon answer, but there are a variety of theories, all of which play some role in inflation:
1. THE MONEY SUPPLY
• Inflation is primarily caused by an increase in the money supply that outpaces economic growth.
• Ever since industrialized nations moved away from the gold standard during the past century,
the value of money is determined by the amount of currency that is in circulation and the public’s perception of the value of that money. When the Federal Reserve decides to put more money into circulation at a rate higher than the economy’s growth rate, the value of money can fall because of the changing public perception of the value of the underlying currency. As a result, this devaluation will force prices to rise due to the fact that each unit of currency is now worth less.
• One way of looking at the money supply effect on inflation is the same way collectors value
items. The rarer a specific item is, the more valuable it must be. The same logic works for currency; the less currency there is in the money supply, the more valuable that currency will be. When a government decides to print new currency, they essentially water down the value of the money already in circulation. A more macroeconomic way of looking at the negative effects of an increased money supply is that there will be more dollars chasing the same amount of goods in an economy, which will inevitably lead to increased demand and therefore higher prices. 2. THE NATIONAL DEBT
• We all know that high national debt in the U.S. is a bad thing, but did you know that it can actually drive inflation to higher levels over time? The reason for this is that as a country’s debt increases, the government has two options: they can either raise taxes or print more money to pay