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Moderate inflation in a good economy

Video transcript

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 nuanced twists to this, but this is the general idea of a why a moderate level of inflation is kind of associated with this virtuous cycle you normally see in a good economy.