DSST Money & Banking Part 1

2 inflation destroys real value in money deflation

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[2] Inflation destroys real value in money. Deflation creates real value in money. Alternatively, the term deflation was used by  the  classical  economists to refer to a decrease in the  money supply  and  credit ; some economists, including many  Austrian   school  economists, still use the word in this sense. [3]  The two meanings are closely related, since a decrease in the money  supply is likely to cause a decrease in the price level. Deflation is considered a problem in a modern economy because of the potential of a  deflationary spiral  and its  association with the  Great Depression , although not all episodes of deflation correspond to periods of poor economic  growth historically.
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While almost all economic theories dismissed deflation as being less than even a remote possibility in modern economies  in the last three decades of the 20th century, the only major theory that deals with periods of inflation and deflation is the  long-wave cycle known as the  Kondratieff wave [4] In  mainstream economics , deflation is caused by a combination of the supply and demand for goods and the supply and  demand for money, specifically the supply of money going down and the supply of goods going up. Historic episodes of  deflation have often been associated with the supply of goods going up (due to increased productivity) without an increase  in the supply of money, or (as with the Great Depression and possibly Japan in the early 1990s) the demand for goods  going down combined with a decrease in the money supply. Studies of the Great Depression by  Ben Bernanke  have  indicated that, in response to decreased demand, the Federal Reserve of the time decreased the money supply, hence  contributing to deflation. Gross domestic product  ( GDP ) "value of all final goods and services produced in a country in 1 year Gross National Product  ( GNP ) is the "value of all (final) goods and services produced in a country in one year, plus  income earned by its citizens abroad, minus income earned by foreigners in the country". [2]   Key difference between the two  is that GDP is the total  output of a country  (United States) while GNP is the total  output of all people  (nationals) of a country (Americans) regardless of where they currently reside. Gross Domestic Product (GDP):  Income Approach  calculates national income, which is the sum of all factor earnings, or net GNP minus indirect  business taxes.  Product Approach  measures GDP using the four types of product that make up GNP (consumption goods, GPDI  goods, government purchases of goods and services, exports).
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