Overview
Purpose:
To show the viewer the gradual development of inflationary pressures in the post-war U.S. economy, and to show why these pressures posed problems for policymakers and also for Keynesian economics.
Objectives:
1. By inflation, we mean a general rise in the overall price level as measured by a price index, say the consumer price index (CPI).
2. Inflation, especially unexpected inflation, imposes costs on the economy. These costs include:
a) distortions in the tax system
b) gains by debtors and losses by creditors
c) increased uncertainty
d) losses by people with fixed incomes.
3. In the post-war period, inflation has become a problem principally because the economy has been operating close to or at the vertical portions of the aggregate supply curve.This means that boosts to aggregate demand, through stimulative fiscal policy, have not only only raised growth, but have also raised prices.
4. Because the ideas of Keynes were conceived at a time when the world economy was in a depression, he was not overly concerned with the problems of inflation. Keynesian economics implicitly assumed a flat aggregate supply curve.
When an economy is not in a depression or recession, monetary influences in the economy both on GNP and prices become more important. This was subject was given little attention by most of Keynes’ followers.
| Key Economic Concepts demand-pull inflation, supply shocks, aggregate supply, aggregate demand
monetary policy, cost of living adjustments, expected versus unexpected inflation. |
| Contemporary Issues In recent years as the rate of inflation has continued to slide, there has been more talk about deflation. The last time the U.S. suffered through deflation was in the 1930s. In modern, times the only industrial economy to experience deflation has been Japan. Why is deflation a problem? How do people behave differently when they expect prices to fall rather than rise? Is fiscal or monetary policy more effective in fighting deflation? Are all types of deflation bad? What if prices were falling because of a technology boom? |
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