tailieunhanh - Ten Principles of Economics - Part 63

Ten Principles of Economics - Part 63. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 28 MONEY GROWTH AND INFLATION 641 I QUICK QUIZ The government of a country increases the growth rate of the money supply from 5 percent per year to 50 percent per year. What happens to prices What happens to nominal interest rates Why might the government be doing this THE COSTS OF INFLATION In the late 1970s when the . inflation rate reached about 10 percent per year inflation dominated debates over economic policy. And even though inflation was low during the 1990s inflation remained a closely watched macroeconomic variable. One 1996 study found that inflation was the economic term mentioned most often in . newspapers far ahead of second-place finisher unemployment and third-place finisher productivity . Inflation is closely watched and widely discussed because it is thought to be a serious economic problem. But is that true And if so why A FALL IN PURCHASING POWER THE INFLATION FALLACY If you ask the typical person why inflation is bad he will tell you that the answer is obvious Inflation robs him of the purchasing power of his hard-earned dollars. When prices rise each dollar of income buys fewer goods and services. Thus it might seem that inflation directly lowers living standards. Yet further thought reveals a fallacy in this answer. When prices rise buyers of goods and services pay more for what they buy. At the same time however sellers of goods and services get more for what they sell. Because most people earn their incomes by selling their services such as their labor inflation in incomes goes hand in hand with inflation in prices. Thus inflation does not in itself reduce people s real purchasing power. People believe the inflation fallacy because they do not appreciate the principle of monetary neutrality. A worker who receives an annual raise of 10 percent tends to view that raise as a reward for her own talent and effort. When an inflation rate of 6 percent reduces the real value of that raise to only 4 percent the worker might feel that