Inflation scenarios
Moderate Inflation in a Good Economy Why there tends to be moderate inflation during good economies
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- Any economy is a super complicated thing
- So what I am going to do in this video
- is a super over simplification.
- But it is just a way of thinking about things.
- In particular, I want to think about
- why good economies tend to be associated
- with a moderate level of inflation.
- And that will also help inform us
- when we are thinking about Stagflation
- when we have inflation with a bad economy.
- So, a good economy, employment is up
- And because employment is up,
- employees have more negotiating power
- There's more people who want to hire them,
- there is fewer people who wants their jobs,
- And so wages will go up.
- And since you have more people with jobs,
- And those who have jobs are being paid more,
- You can imagine that demand will also go up.
- There is more people that have money in their pockets.
- And if demand goes up,
- Then companies, or you can think of them as factories,
- But it can also be services,
- Then everything will be utilized more.
- And if things are utilized more,
- Then the companies or those factories
- or whatever you want to think of them,
- They are going to have more profit.
- On top of that, if they get close to fully utilization,
- Or if they see that fully utilization is down the road,
- They are going to want to invest more.
- And, they could actually push off that
- utilization and get more profit,
- by maybe raising prices.
- So this is where that moderate of inflation,
- really shows up.
- The fact that there is more demand,
- the fact that you can produce a little bit more,
- and it could raise prices a little bit more.
- So this is where,
- the moderate level of inflation shows up.
- And there is a little bit of a negative feedback,
- if price goes up.
- It will inhibit demand a little bit.
- And that is why it is moderate inflation,
- not some type of crazy inflationary spiral here.
- But the net effect of more utilization,
- and more investment
- is going to be an increase in supply.
- is going to be an increase in supply.
- And once again,
- And this is kind of e-con 101,
- If supply goes up, price will also have an
- inhibitory impact on price.
- So let me draw, so we get all the feedback loops here.
- So this is negative feedback right over there.
- But to complete the loop, if we are investing more,
- we are going to build more factories.
- or some more capacity to do services or whatever else.
- That is going to increase employment.
- If we have more profit,
- Then a company feels better about growing,
- It feels more like it have a cushion,
- and feels more optimistic about the future,
- that is going to help employment.
- And obviously, utilization itself
- if we want to run the factory lines longer,
- we are going to need more people to run those lines.
- So that will also increase employment.
- This is like the general feedback loop
- you can add little new twists to this,
- but this is the general idea of a why modern level of inflation,
- kind of associate with this virtuous cycle,
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At 5:31, how is the moon large enough to block the sun? Isn't the sun way larger?
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