ECON 2000 Lecture Notes - Lecture 74: Money Supply

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ECON 2000
Lecture 74
The money hypothesis again: effects of falling prices
- From 1929-1933, US price level fell 25% and many economists
blame this deflation for severity of GD
- Argue that deflation may have turned what in 1931 was a typical
economic downturn into an unprecedented period of high unempl and
depressed income
- Since the falling money supply was believably responsible for falling
price level, could’ve been responsible for severity of Depression
The stabilizing effects of deflation
- Another channel through which falling prices expand income called
Pigou effect
- Real money balances part of household’s wealth
- As prices fall and real money balances rise, consumers should feel
wealthier and spend more
- Increase in consumption spending should cause an expansionary
shift in IS curve leading to higher income
- Two reasons led some to believe that falling prices would help
economy restore itself to full empl
- Others pointed out other effects
The destabilizing effects of deflation
- Two theories to explain how falling prices could depress income
rather than raise it
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Document Summary

The money hypothesis again: effects of falling prices. From 1929-1933, us price level fell 25% and many economists blame this deflation for severity of gd. Argue that deflation may have turned what in 1931 was a typical economic downturn into an unprecedented period of high unempl and depressed income. Since the falling money supply was believably responsible for falling price level, could"ve been responsible for severity of depression. Another channel through which falling prices expand income called. Real money balances part of household"s wealth. As prices fall and real money balances rise, consumers should feel wealthier and spend more. Increase in consumption spending should cause an expansionary shift in is curve leading to higher income. Two reasons led some to believe that falling prices would help economy restore itself to full empl. Two theories to explain how falling prices could depress income rather than raise it. Debt-to-inflation theory concerns the effects of unexpected falls in the price level.

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