08 Inflation

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  0 Chapter 8 Inflation  1 8.1 Introduction  In this chapter, we learn:  What inflation is, and how costly it can be.  How the quantity theory of money and the classical dichotomy help us understand inflation.  The relationship of interest rates and inflation through the Fisher equation.  The important link between fiscal policy and high inflation.  2  Inflation  The percentage change in the overall price level  Hyperinflation  an episode of extremely high inflation  Greater than 500 percent per year (Mankiw : ≥ 50 percent per month)  Example: Post World War I Germany  The inflation rate is computed as the annual percentage change in the price level in period t  ( P  t  ):  The Consumer Price Index (CPI)  Price index for a bundle of consumer goods  3
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