MONEY AND

INFLATION

Mr. T. Madanhire
INTRODUCTION
• Mr T Madanhire
• Business Studies and Economics Teacher
• Rugby and Cricket Coach
• Family Man
• Christian
• Economics and Politics Enthusiast
• Sport
 SYLLABII OVERVIEW
• Business (9606)
• Cambridge International AS & A Level Business allows students to
experience the diverse and dynamic world within which
businesses exist. With a focus on how decisions are made,
students will gain the knowledge to understand how businesses
operate within real contexts, analyse alternative courses of action
and develop the ability to make justified recommendations.
• 1. Business and its environment
• 2. Human resource management
• 3. Marketing
• 4. Operations management
• 5. Finance and accounting
• 6. Strategy
 SYLLABII OVERVIEW
• Economics (9708)
• Cambridge International AS and A Level Economics syllabus
allows learners study how to explain and analyse economic
issues and arguments, evaluate economic information, and
organise, present and communicate ideas and judgements
clearly.
• 1.Basic economic ideas and resource allocation
• 2. The price system and the microeconomy
• 3. Government microeconomic intervention
• 4. The macro economy
• 5. Government macro intervention
 MONEY
Money: anything that is generally acceptable as a means of payment in the exchange
of goods and services
Economists also talk about near money. This is a term that is used to denote non-
cash assets that can be quickly and easily turned into cash.
Such assets include foreign currencies, savings accounts, bonds and certificates of
deposits.
As assets, they contribute to the liquidity of banks by providing a supply of cash if
this is needed to meet their liabilities to depositors.
Currency-a system of money in general use in a particular country.
The advent of money came to be because of problems associated with barter trade/
the barter system. These included
The double-coincidence of wants
Divisibility problems
Valuation problems
Failure to carry out credit transactions
 FUNCTIONS OF MONEY
Money has four main functions namely:
Money is defined by what it does, in other words by the functions that it performs
1.Medium of exchange: Money is the ‘medium’, or form, that buyers use for purchases;
sellers are willing to accept this medium in exchange for these purchases.
2. A unit of account: Prices are quoted in terms of common monetary units. For instance, in
the USA dollars and cents are used, while in Pakistan rupees and paise are used.
This function is of relevance for current and future transactions since it is quite clear just
how much money is required for a particular transaction. It also allows different values to be
added, measured and compared.
3. A standard for deferred payment: Not all payments we make are immediate. Some
household bills are paid monthly, others may be paid annually. Following on from money as
a unit of account, payments can be made in the future once terms have been agreed
between the parties involved.
4. A store of wealth: Money can be held or 'stored’ for a period of time, usually with a bank
or other financial institution, before it is used. This important function means that money is
a measure of value over time. In 2011, the two richest people in the world were both from
the USA: Warren Buffet and Bill Gates. Their personal wealth was in a wide range of assets,
not just in bank accounts. Money was the common basis on which their wealth was
estimated.
 CHARACHTERISTICS OF
MONEY
Divisibility
Portability
Durability
Uniformity
Stability
Scarcity
Confidence
 THE ZIMBABWEAN CASE
Timeline
1970- Rhodesian dollar introduced
1980-Zim dollar replaced Rhodesian dollar and was at 1:1
with the US dollar
1980-2009- Over time, hyperinflation in Zimbabwe
reduced the Zimbabwe dollar to one of the lowest valued
currency units in the world
It was redenominated three times (in 2006, 2008 and
2009), with denominations up to a $100 trillion banknote
issued. The final redenomination produced the "fourth
dollar" (ZWL), which was worth 1025 ZWD (first dollar
 THE ZIMBABWEAN CASE
Timeline cont
2009-Use of the Zimbabwean dollar as an official currency was effectively
abandoned on 12 April 2009.
Multi-currency system was adopted
2016-In November 2016, backed by a US$200 million African Export-Import Bank
loan, the Reserve Bank of Zimbabwe began issuing $2 bond notes.
The notes were not generally accepted by the Zimbabwean people, so the
government tried expanding the electronic money supply and issuing Treasury bills
instead.
2019- MONOCURRENCY SYSTEM ADOPTED The Statutory Instrument 142 of 2019
gazetted today reads in part, “With effect from the 24th June 2019, the British
pound, United States dollar, South Africa rand, Botswana Pula and any other
foreign currency whatsoever shall no longer be legal tender alongside the
Zimbabwe dollar in any transactions in Zimbabwe.”
2020- Statutory Instrument 85 of 2020. “Payment for goods and services using free
funds
INFLATION
• Inflation is the sustained increase in an economy’s price level over a given
period of time.
• It is measured as a percentage and it varies from very low levels (creeping
inflation) e.g 2% to extreme cases known as (hyperinflation) where it exceeds
50%
• When the price level increases, the value of money falls and its purchasing
power declines.
• Each unit of the currency, e.g. each dollar note, will buy less.
• Money is unable to perform its functions effectively, that is it becomes limied
in its use as a:
• Medium of exchange
• Store of Value
• Standard of deffered payments
• Unit of account
 MEASUREMENT OF
• A INFLATION
country’s price level indicates how much it costs to live in that country.
• A rise in the price level means that the cost of living has increased.
• To assess changes in the cost of living, governments construct consumer price indices.
• Changes in the Consumer Price Index (CPI) are used to track the rate of Inflation year by
year
• To construct a CPI, 5 stages must be followed
• 1. Select a Base Year- The assumption is that no Inflation has occurred in this year and it is
a point of reference or starting point (given an index of 100)
• 2. Carry out a survey- on people’s spending patterns and come up with a basket of goods
comprising of common spending categories across different households
• 3. Attach weights to the different categories- Weights are based on the proportion of total
expenditure spent on the different categories
• 4. Calculate price changes- Calculate the changes in the average price of goods and
services across the different categories in the basket
• 5. Calculate the weighted price indices (WPI) of all categories in the basket – This is done
by multiplying the weight of that category (3) and the % change in the average price of
that category:
• Finally the total of all the weighted price indices of the different categories (WPI) = CPI
 EXAMPLE
CATEGORY WEIGHT % PRICE WEIGHTED PRICE
CHANGE CHANGE
TRANSPORT 0.1 25 2.5
EDUCATION 0.3 10 3
FOOD 0.4 30 12
HOUSING 0.2 5 1
% CHANGE IN CPI 18.5

• The basket of goods used after carrying out a survey consists of 4 main categories- transport, housing,
food and housing
• A weight has been attached to each category according to how much (as a portion of total household )
income is spent on that category e.g. households spend 0.4 of their disposable income on food
• % price changes of each category have been calculated e.g. education prices increased by 10% over the
year
• The weighted price change (WPI = WEIGHT X %PRICE CHANGE). For each category was calculated e.g.
WPI for transport is 2.5
• The total of all the Weighted Price changes gives the change in CPI for the current year, which is 18.5%
• 18.5% is the change in the general price level, therefore the inflation rate for the above period
 CAUSES OF INFLATION
• There are two broad causes of Inflation namely Cost-push Inflation
and Demand-pull inflation
• Cost-push Inflation
• This occurs when prices are pushed up by increases in the cost of
production.
• Increases in real material costs, wages, taxes by government and
fuel can also push up prices.
• In some cases, these increases in cost may be caused by a fall in
the exchange rate.
• A depreciation of the exchange rate means that importing raw
materials becomes expensive.
• Producers will increase their prices to cover these costs
 CAUSES OF INFLATION
• Demand Pull Inflation
• This is inflation caused by increases in aggregate demand
not matched by equivalent increases in aggregate supply.
• There is too much money chasing too few goods
• Increases in aggregate demand may result from an
increase consumption, investment , government or net
export expenditure
BENEFITS AND COSTS OF
INFLATION
Benefits
• Stimulates output: A low and stable inflation rate caused by increasing demand may
make firms feel optimistic about the future
• Reduce the burden of debt: Real interest rates may fall due to inflation or may even
become negative, as a result, debt burdens may fall.
• Prevent some unemployment: Firms in difficulties may have to reduce their costs to
survive. Inflation would enable them to reduce the real costs of labour by either
keeping nominal (money) wages constant or by not raising them in line with inflation
Costs
• Menu costs: costs to firms of having to change prices due to inflation.
• Shoe leather costs: costs of moving money around in search of the highest interest
rate.
• Fiscal drag: the income of people and firms being pushed into higher tax brackets as
a result of inflation.
• Inflationary noise: confusion over relative prices caused by inflation.
 DEFLATION AND
DISINFLATION
• Deflation is the sustained fall in the general price level over a given period of time.
• It results in a rise in the value of money, with each currency unit having greater
purchasing power.
• Deflation involves a negative inflation rate, for example, –3%.
• In contrast, disinflation occurs when the inflation rate falls but is still positive. For
instance, the inflation rate may decline from 8% to 6%. In this case, the general price
level is still rising but at a slower rate.
• Deflation can be caused by either depressed aggregate expenditure in an economy (Bad
deflation) or an increase in the total output produced by suppliers (Good deflation)
• A decrease in AD which leads to a fall in the general price level is deemed as bad
deflation because it causes unemployment and a fall in Real GDP.
• Also consumers become speculative and delay the purchase of goods and services
further in anticipation that prices will fall even further, resulting in a further decline in
economic activity
• An increase in AS which leads to a fall in the general price level is deemed as good
deflation because it leads to an increase in Real GDP and employment. This means
more output is produced in the economy and sold at lower prices