Essay On Inflation And Deflation Part Time Social Work Courses
To see why most economists have had a hard time taking this view seriously, consider the simple aggregate-supply aggregate-demand diagram ( Figure 1 ) that appears in virtually every principles text.What advocates of the simple excess capacity story seem to be saying is that the AS curve has shifted right, as illustrated in the figure.So far, none of these price declines looks anything like the massive deflation that accompanied the Great Depression.
True, a country committed to a fixed exchange rate cannot freely print money even if it is faced with deflation; that is why deflation in Hong Kong or Brazil are not particularly troubling from a theoretical (as opposed to practical) point of view. The liquidity trap According to the textbooks, the aggregate demand curve derives its slope from the impact of the price level on the real money supply.
But large economies with freely floating exchange rates - like Japan, or euroland, or the United States - are free to expand the money supply as much as they like. But it has become clear from Japan's experience that it isn't that easy after all. The standard linkage runs like this: A lower price level leads to a higher level of M/P, which leads to a lower interest rate, which leads to higher investment and hence to greater aggregate spending.
Since the linkage runs through M/P, then, the curve can always be shifted up simply by increasing M.
Finally, I consider the policy implications of the apparent emergence of a serious deflationary threat. Meanwhile, demand is not keeping up - perhaps because income is too unequally distributed, perhaps because consumers (outside the United States) are satiated.
The result is global excess capacity, which exerts an inexorable downward pressure on prices.