Many people fear "deflation," by which they mean a "general decline in prices." We have already seen that declines in prices signal increased production (not a bad thing.) Let's look at the effects of declines in the money supply (real deflation).

I have based the scenarios in this section on the assumption of constant deflation: money supply steadily declining at 0.5% per month.

Since the models have the same format as in the inflation section I will not provide as much detail in the explanations.