Deflation

The Free Market Center

Money Matters Presentation

Deflation (Decreasing Money Supply)

Shoe Production Increases

Shoe Productivity Increases	2.00%/Month
Wheat Productivity Fixed	0.00%/Month
Money Supply Decreases	-0.50%/Month

In this case the productivity for shoes increases, while the supply of money declines by 0.5% per month.

Dollar prices decline as you would expect. But, notice how they decline more than when production increased in an environment of fixed money supply.

Again, notice the decline in wheat dollar prices, in spite of no change in production.

Deflation (decreasing money supply) pushes dollar prices down more than expected, distorting market information.

Next, we'll look at some special scenarios that combine effects, starting with a surge in inflation.