Monetary Economics

1. Inflation
   1. Causes and Types of Inflation
      1. Demand-Pull Inflation
         1. Definition: Occurs when the demand for goods and services exceeds supply
         2. Contributing factors
            1. Increased consumer spending
            2. Elevated government expenditure
            3. Expansionary monetary policy
         3. Economic implications
            1. Short-term economic growth
            2. Overheating economy risks
      2. Cost-Push Inflation
         1. Definition: Arises due to a rise in the price of production inputs
         2. Contributing factors
            1. Increase in wages
            2. Rise in costs of raw materials
            3. Supply chain disruptions
         3. Impact on businesses
            1. Reduced profit margins
            2. Potential for passing costs to consumers
      3. Built-In Inflation
         1. Definition: Linked to adaptive expectations where past inflation influences future expectations
         2. Wage-price spiral process
            1. Workers demand higher wages
            2. Businesses increase prices to cover higher wage costs
            3. Cycle reinforcing itself
   2. Effects of Inflation on the Economy
      1. Positive effects
         1. Reduction in real burden of debt
         2. Incentive to invest rather than hoard
      2. Negative effects
         1. Decrease in purchasing power
         2. Uncertainty leading to reduced economic investment
         3. Wage-price spiral leading to potential hyperinflation
         4. Inequality impacts
            1. Disproportionate burden on low-income earners
            2. Erosion of savings
   3. Inflation Measurement
      1. Consumer Price Index (CPI)
         1. Definition and purpose: Tracks changes in the price of a basket of goods and services
         2. Calculation method
            1. Selection of items in the basket
            2. Weighting of basket components
         3. Uses and limitations
            1. Comparison of cost of living
            2. Potential outdated basket leading to inaccuracies
      2. Producer Price Index (PPI)
         1. Definition and purpose: Measures average changes in selling prices received by domestic producers
         2. Difference from CPI
            1. Focus on goods at wholesale level
            2. Exclusion of services
         3. Implications for future consumer prices
            1. Indicator of potential CPI changes
   4. Hyperinflation
      1. Definition and characteristics
         1. Exponential increase in prices
         2. Rapid erosion of currency value
      2. Historical examples and case studies
         1. Weimar Republic Germany
         2. Zimbabwe in the late 2000s
      3. Causes
         1. Loss of confidence in currency
         2. Excessive money printing
      4. Consequences
         1. Barter system reinstatement
         2. Collapse of monetary system
   5. Deflation and Stagflation
      1. Deflation
         1. Definition: Decrease in the general price level of goods and services
         2. Causes
            1. Decrease in consumer demand
            2. Increase in production efficiency
         3. Economic impact
            1. Increased real value of debt
            2. Deferred consumption further negatively impacting demand
      2. Stagflation
         1. Definition: Combination of stagnant economic growth and high inflation
         2. Historical example: 1970s oil crisis
         3. Causes
            1. Supply shocks
            2. Inadequate economic policy responses
         4. Challenges for policymakers
            1. Dilemma of increasing interest rates worsening unemployment