DSST Money & Banking Part 1

2 inflation destroys real value in money deflation

Info icon This preview shows pages 16–18. Sign up to view the full content.

View Full Document Right Arrow Icon
[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.
Image of page 16

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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).
Image of page 17
Image of page 18
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern