The theoretical case for how deflation arises (rate of growth of money supply relative to the rate of growth for the demand for money.
Deflation, or negative inflation, happens when prices fall because the supply of goods is higher than the demand for those goods.
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but deflation increases it. This allows one to buy more goods and services than before with the same amount of currency.
Deflation usually happens when supply is high (when excess production occurs), when demand is low (when consumption decreases), or when the money supply decreases (sometimes in response to a contraction created from careless investment or a credit crunch). It can also happen as a result of too much competition and too little market concentration.
Let us take the case of Japan's deflation.
Deflation started in the early 1990s. The Bank of Japan and the government tried to eliminate it by reducing interest rates and 'quantitative easing', but did not create a sustained increase in broad money and deflation persisted. In July 2006, the zero-rate policy was ended.
Systemic reasons for deflation in Japan can be said to include:
In November 2009, Japan returned to deflation, according to the Wall Street Journal. Bloomberg L.P. reports that consumer prices fell in October 2009 by a near-record 2.2%.
The theoretical case for how deflation arises (rate of growth of money supply relative to the...
7. Assume that output growth in the U.S. is 2%, money demand (L) is constant and money supply growth is 4%. Assume that output growth in China is 5%, L is constant and money supply growth is 9%. a. Assume that relative PPP and the quantity theory of money holds. What is the growth rate of the dollar-China exchange rate (%∆E$/China)? b. What should money supply growth be in China if China wants to fix its currency to the dollar?...
Maintaining the growth of the money supply at a constant rate is an example of a A. discretionary policy. B. the gold standard. C. an inflation targeting rule. D. a money demand rule. E. a money targeting rule.
Maintaining the growth of the money supply at a constant rate is an example of a O A. the gold standard. OB. an inflation targeting rule. O C. a money targeting rule. OD. discretionary policy. O E. a money demand rule.
7. Assume that output growth in the U.S. is 2%, money demand (L) is constant and money supply growth is 4%. Assume that output growth in China is 58, L is constant and money supply growth is 98. a. Assume that relative PPP and the quantity theory of money holds. What is the growth rate of the dollar-China exchange rate (AES/China)? b. What should money supply growth be in China if China wants to fix its currency to the dollar?...
42. On a given aggregate demand curve, if the rate of spending growth is 10% and the growth rate of the money supply is 2%, then the velocity of money must be growing at: A) 5% B) 8%. 12%. D) 20% 43. According to the quantity theory of money, if both the growth rate of the money supply and the velocity of money are fixed, then a higher inflation rate means: A) a higher real growth rate. B) no change...
Question 35 If the money supply growth rate permanently increased from 4 percent to 10 percent, what would we expect to happen to the inflation rate and the nominal interest rate? Both the inflation rate and the nominal interest rate would increase by less than 6 percent. The inflation rate would increase by 6 percent, and the nominal interest rate would increase by less than 10 percent. The inflation rate would increase by less than 6 percent, and the nominal interest rate would increase...
Economists agree that increases in the money supply growth rate increases inflation and that inflation is undesirable. So why have there been hyperinflations and how have they been ended?
An increase in the money supply can typically affect the economy with a lag of: 2 to 3 months. 4 to 10 months. 6 to 18 months. 10 to 24 months. When a negative shock to aggregate demand occurs, the inflation rate will: increase. decrease. remain the same. be automatically adjusted by the Fed. How can the Fed offset a positive shock to aggregate demand? Decrease the growth rate of government spending. Increase the growth rate of government spending. Decrease...
The diagram below shows the demand for money and the supply of money. A) Explain why the Money Demand Curve is a downward sloping curve. B) Suppose the interest rate is at iA. Explain how firms and households attempt to satisfy their excess demand for money. What is the effect of their actions? C) Suppose the interest rate is at iB. Explain how firms and households attempt to dispose of their excess supply of money. What is the effect of...
The figure below shows the growth in the money supply and average inflation rates for 160 countries from 1991–2011. For most countries, there is a one-to-one ratio between money growth and inflation. For example, both the growth in the money supply and the average inflation rate was close to 100% in Belarus. Refer to the figure to answer the following questions. 1st attempt Part 1 (1 point) See Hint Consider the countries that lie on the line, which shows a one-to-one...