TheClassicalTheoryofInflation.pdf

Money Growth and Inflation oday, if you want to buy an ice-cream cone, you need at least a couple of dollars, but that has not always been the case. In the 1930s, my grand- mother ran a sweet shop in Trenton, New Jersey, where she sold ice- cream cones in two sizes. A cone with a small scoop of ice cream cost threeT cents. Hungry customers could buy a large scoop for a nickel. You may not be surprised at the increase in the price of ice cream. In our econo-my, most prices tend to rise over time. This increase in the overall level of prices is called inflation. Earlier in the book, we examined how economists measure the inflation rate as the percentage change in the consumer price index (CPI), the GDP deflator, or some other index of the overall price level. These price indexes show that, over the past 70 years, prices have risen on average about 4 percent per year. Accumulated over so many years, a 4 percent annual inflation rate leads to a sixteenfold increase in the price level. 243347459643 244348460644 PART VVIVIIIX Money and Prices in the Long Run Inflation may seem natural and inevitable to a person who grew up in the United States during recent decades, but in fact, it is not inevitable at all. There were long periods in the 19th century during which most prices fell—a phenome- non called deflation. The average level of prices in the U.S. economy was 23 percent lower in 1896 than in 1880, and this deflation was a major issue in the presidential election of 1896. Farmers, who had accumulated large deb