What happens when Production & Sales for shoes and wheat change in opposite directions?

Variables

Set for this scenario

You should set these values before the first simulation, and leave them during succeeding simulations in this scenario.

annual fractional shoe increases: 0.08 [Unitless] Set and leave for these simulations
annual fractional wheat increases: -0.04 [Unitless] Set and leave for these simulations

Adjust this variable as instructed

annual fractional money increase rate: [Default] 0.0/Year

GIF89a

Fixed Money Supply - Simulation 1

brief description

Variables to Adjust

annual fractional money increase rate: 0.0/Year

Simulations

Sales: Sales of shoes rise steadily while sales of wheat declines, at a slower rate, throughout the simulation. Note: Read shoe sales on the left scale and wheat sales on the right scale.
Inventories: Again inventories rise in accordance with the relative rate of production over sales.
Direct Exchange Prices: The increasing sales of shoes causes its marginal utility, and therefore its price in units of wheat, to decline steadily. Since the sales of wheat decline, its price in units of shoes rises steadily.
Money Supply: The quantity of money remains the same ($10,000) for the whole 60 months.
Dollar Prices: As one would expect the dollar price of the product with rising sales (shoes) declines, and the dollar price of the product with declining sales (wheat) rises.
Price Conversion: And, the price conversion provides the same results as the direct exchange prices.

Comments:

By this time you should have developed a familiarity with these simulations, so I will keep my comments brief.

With a fixed money supply products with declining production and sales exhibit rising prices. Those with rising production and sales exhibit declining prices.

The market gets clear signals.

Increasing Money Supply - Simulation 2

brief description

Variables to Adjust

annual fractional money increase rate: 0.07/Year

Simulations

Sales: Same as simulation 1.
Inventories: Same as simulation 1.
Direct Exchange Prices: Same as simulation 1.
Money Supply: The quantity of money (dollars) remains the constant ($10,000) for the first 10 months; it then increases steadily (at 7% per annum) for 40 months; and it levels off again for the last 10 months.
Dollar Prices: This simulation provides another dramatic demonstration of the confusing price signals caused by expanding money supply. During the first 10 months dollar prices sketch out the same pattern we saw in the non-inflation simulation. During months 11 through 50, however, the changes in the quantity of money cause the decline in the price of shoes to slow from its previous trend, and the price of wheat accelerates from its previous trend. In the last 10 months, after money growth stops, price trends return to their former rates, although from different levels.
Price Conversion: Same as simulation 1.

Comments:

Consider the possibility that during the period of inflation that entrepreneurs might direct relatively too many resources to one product and relatively too few to another.

Doesn't expanding the money supply cause actors to misallocate resources by making sound decisions based on flawed information? Don't the advocates of inflation—even modest inflation—support policies that lead to market distortions?

What about deflation? Go to the next tab.

Decreasing Money Supply - Simulation 3

brief description

Variables to Adjust

annual fractional money increase rate: -0.07/Year

Simulations

Sales: Same.
Inventories: Same as simulation 1.
Direct Exchange Prices: Same as simulation 1.
Money Supply: The quantity of money (dollars) remains the constant ($10,000) for the first 10 months; it then decreases steadily (at -7% per annum) for 40 months; and it levels off again for the last 10 months.
Dollar Prices: In this simulation the price decline for shoes accelerates when the quantity of money declines, and the rising price of wheat actually reverses. As you have witnessed before the price trends return to their previous rates when the deflation ends.
Price Conversion: Same as simulation 1.

Comments:

Yes, monetary deflation sends some very dangerous signals.

But, the solution does not lie with inflation—even "moderate" and "steady" inflation.

Mixed Production & Sales - Summary

Production & Sales Assumptions

Shoe Production & Sales: increase by 8% per annum
Wheat Production & Sales: decrease by 4% per annum

Fixed Money Supply

By this time the dollar price simulations should not surprise you. When the production and sales of shoes increases, the price declines. And conversely, when the production and sales of wheat declines, the price increases.

Inflation

What do these dollar prices tell you? Initially in the first 10 months, as you've learned, shoe production and sales are increasing and wheat production and sales are declining. By knowing the slopes of those two trends you would get a reasonably good idea of their relative supply. After inflation kicks in, the trends seem to move in the same direction, but the relative differences are not so clear.

Deflation

As the money supply contracts it causes very confusing and potentially dangerous signals for the market. It makes it seem as if the supply of shoes is growing faster than it actually is, and that the supply of wheat, which is in relatively short supply, is actually growing in supply.

Summary Comments

In this last scenario, which I refer to as mixed production and sales, we have probably the most realistic model of economic activity. In any period of time some products have an increasing supply while others have a declining supply. The market relies on dollar prices to signal where relative excesses and shortages exist in order to know where to allocate capital. It will tend to move that capital from areas of relative excess to relative shortage. But, in periods of either inflation or deflation, the signals upon which they must rely become unreliable. As a result, economic actors make rational decisions based on flawed information and thereby achieve unexpected, and frequently undesired, effects.

What conclusions can we draw?...