KW_Macro_Ch_16_Sec_04_Deflation - chapter 16 > Inflation...

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>> Inflation, Disinflation, and Deflation Section 4: Deflation chapter 16 Before World War II, deflation —a falling aggregate price level—was almost as common as inflation. In fact, the U.S. consumer price index on the eve of World War II was 30% lower than it had been in 1920. After World War II, inflation became the norm in all countries. But in the 1990s deflation reappeared in Japan and proved difficult to reverse. Other countries, including the United States, became concerned that they might face similar problems. Why is deflation a problem? And why is it hard to end? Effects of Unexpected Deflation Unexpected deflation, like unexpected inflation, produces both winners and losers—but in the opposite direction. Lenders, who are owed money, gain because the real value of borrowers’ payments increases. Borrowers lose because the real burden of their debt rises.
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2 CHAPTER 16 SECTION 4: DEFLATION In a famous analysis at the beginning of the Great Depression, Irving Fisher (who described the Fisher effect on interest rates) suggested that the effects of deflation on borrowers and lenders can worsen an economic slump. Deflation, in effect, takes real resources away from borrowers and redistributes them to lenders. Fisher argued that
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KW_Macro_Ch_16_Sec_04_Deflation - chapter 16 > Inflation...

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