Deflation - Production Up

The Free Market Center

Inflation—Deflation

Deflationary Surge - Shoe Production Increases

(Money Supply Decreases for a Period)

Shoe Production Increases

Shoe Production Increases	2.00%/Month
Wheat Production Fixed	0.00%/Month
Money Supply Decreases from month 20 through month 30	-2.00%/Month

Here shoe production increases steadily throughout the period.

In the second two scenarios in this section money growth surges from 0% per month to -2% per month during months 20 through 30.

See how the rapid reduction in the quantity of money accelerates the natural decline in dollar prices for shoes.

Again, wheat prices fall victim to this monetary deflation.

Same effect on direct exchange prices that we expect from increased shoe production.

What effect does the declining money supply have on dollar prices with decreasing production of shoes?