Inflation/Deflation

Before we can discuss the effects of inflation and deflation we must understand the meaning of the words.

Inflation and Deflation refer only to changes in the quantity of money.

Inflation

Increase in the
quantity of money

Not Inflation

Increase in the
general price level

Deflation

Decrease in the
quantity of money

Not Deflation

Decrease in the
general price level

Changes in the general price level do not amount to inflation or deflation. Changes in the quantity of money (Inflation or Deflation) cause changes in the general price level.

A model showing the effects of Inflation/Deflation comes next.