Thursday 261029

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 10 Money and Prices in the Long Run

Chapter 30 of 36 Money Growth and Inflation

Section 21 of 24

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Economists have identified several costs of inflation

· shoe leather costs

· menu costs

· inflation-induced tax distortions

· confusion and inconvenience

· arbitrary redistribution of wealth

All create relative price variability and the misallocation of resources.

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Confusion and Inconvenience

If we yearly changed how many inches were in a yard, it would cause confusion and inconvenience.

Money is the economy's unit of account and is what we use to quote prices, record debts, and measure all economic transactions.

When the Federal Reserve increases the money supply and creates inflation it decreases the real value of the unit of account.

This causes substantial costs due to the resulting confusion and inconvenience.

The tax code incorrectly measures real incomes because of inflation.

Similarly, accountants incorrectly measure firms' earnings when prices are rising.

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Because inflation causes dollars over time to have different real values, computing a firm's profit —the difference between its revenue and costs—

is more complicated when there is inflation.

Inflation makes investors around the world less able to sort successful and unsuccessful firms.

This impedes financial markets from optimally allocating the economy's savings to investments.

Inability to assess the true value of resources makes efficient use of them difficult.

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confusion and inconvenience

konran to fuben

混乱と不便

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Why does the U.S. Federal Reserve target a 2% inflation rate rather than 1%? ChatGPT:

The Fed targets 2% inflation rather than 1% mainly because it wants a larger cushion against deflation and recessions.

A 1% target would slightly reduce inflation-related distortions, but it would also tend to keep nominal interest rates lower, leaving the Fed less room to cut rates when the economy weakens.

So, 2% is intended as a compromise: low enough to preserve price stability reasonably well, but high enough to reduce the risk of deflation and give monetary policy more room during downturns.