Inflation/Deflation Model

To summarize the effects of inflation/deflation (increasing/decreasing quantity of money) I will review the discussion of inflation and deflation that I posted in another section of this web site.

This example shows two products (wheat and shoes) exchanged for money. I have made the following assumptions regarding changes in production and changes in the money supply:

Production Changes

Over the period covered by this model, in all money supply scenarios, the production of shoes increases steadily at 2% per month while production of wheat remains constant.

Shoe Productivity Increases

2.00%/Month

Wheat Productivity Fixed

0.00%/Month

Money Supply Changes

Based on those production changes I have developed five scenarios regarding changes in the quantity of money:

Fixed Money Supply

Money Supply Fixed

0.00%/Month

Inflation

Money Supply Increases

0.50%/Month

Deflation

Money Supply Decreases

-0.50%/Month

Monetary Surges

Surge Up

Money Supply Increases from month 20 through month 30

2.00%/Month

Surge Down

Money Supply Decreases from month 20 through month 30

-2.00%/Month

We'll set the stage for this investigation of inflation/deflation by first depicting the transaction using Direct Exchange.