Lu Xun Posted December 8, 2011 Report Share Posted December 8, 2011 A decrease in inflation = decrease in price.Deflation = decrease in price.Does this mean that a decrease in inflation is the same as deflation?What would be the effect of decreasing the bank's interest rate on inflation? Reply Link to post Share on other sites More sharing options...
dessskris Posted December 8, 2011 Report Share Posted December 8, 2011 A decrease in inflation = decrease in price.Deflation = decrease in price.Does this mean that a decrease in inflation is the same as deflation?What would be the effect of decreasing the bank's interest rate on inflation?I personally don't think that a decrease in inflation <=> decrease in price. for example:initial general price level = $50after quarter 1 = $60after quarter 2 = $70after quarter 3 = $80after quarter 4 = $90after quarter 5 = $95after quarter 6 = $100after quarter 7 = $105that. since quarter 5, there's a decrease in inflation. but it's still inflationnow,after quarter 8 = $95after quarter 9 = $85after quarter 10 = $75after quarter 11 = $65now that is deflation.that's what I think. if anyone could confirm it, that would be great.decreasing IR is a demand side monetary policy. if IR decreases, people are less interested to save, investment decreases, AD decreases, it slows inflation down. 2 Reply Link to post Share on other sites More sharing options...
Lu Xun Posted December 8, 2011 Author Report Share Posted December 8, 2011 (edited) A decrease in inflation = decrease in price.Deflation = decrease in price.Does this mean that a decrease in inflation is the same as deflation?What would be the effect of decreasing the bank's interest rate on inflation?I personally don't think that a decrease in inflation <=> decrease in price. for example:initial general price level = $50after quarter 1 = $60after quarter 2 = $70after quarter 3 = $80after quarter 4 = $90after quarter 5 = $95after quarter 6 = $100after quarter 7 = $105that. since quarter 5, there's a decrease in inflation. but it's still inflationnow,after quarter 8 = $95after quarter 9 = $85after quarter 10 = $75after quarter 11 = $65now that is deflation.that's what I think. if anyone could confirm it, that would be great.decreasing IR is a demand side monetary policy. if IR decreases, people are less interested to save, investment decreases, AD decreases, it slows inflation down.based on your definition, how would you draw a diagram showing a decrease in inflation?is it still correct to draw a decrease in Average Price Level and a shift in Aggregate Demand?by the way, which diagram should i use? keynesian or neo-classical? Edited December 8, 2011 by Summer Glau please don't use text speak. thanks! Reply Link to post Share on other sites More sharing options...
dessskris Posted December 8, 2011 Report Share Posted December 8, 2011 actually what's happening? the inflation has been reduced? if so, what happened? if it's the AD that has changed, well yes you shift the demand curve to the left. if it's the LRAS that has changed then you shift the LRAS to the right. either way would be fine.I'm worried about your understanding. draw a shift in AD, which causes the ave price level to change. not the other way round.it's up to you honestly, whichever you like better or understand better. personally though, I usually draw the classical one. Reply Link to post Share on other sites More sharing options...
blenderer Posted December 8, 2011 Report Share Posted December 8, 2011 A decrease in inflation = decrease in price.Deflation = decrease in price.Does this mean that a decrease in inflation is the same as deflation?Decrease in the rate inflation = disinflation (i.e. prices still rise but at a lower rate)Rate of inflation goes below 0 = deflation (i.e. prices decrease)based on ur definition, how would u draw a diagram showing a decrease in inflation?is it still correct to draw a decrease in Average Price Level and a shift in Aggregate Demand?Well, it depends on what you are asked for. If it is, like you said, " a diagram showing a decrease in inflation", you would simply draw a graph where y-axis = inlfation rate and x-axis = time. The rest is pretty self-explanatory so I'll leave that for you. It is worth noting however, that usually when you deal with changes in inflation you are asked to draw a diagram representing the effects on employment. In this case you can use a simple Phillips curve (google it if you don't know what it is) to illustrate the effect.Did this help at all? 1 Reply Link to post Share on other sites More sharing options...
Guest Animistic Anaemia Posted December 8, 2011 Report Share Posted December 8, 2011 (edited) Actually, the definition of inflation is a rise of the price above the average price level while deflation is a decrease in this APL. Thus, there can still be a positive inflation if there's a decrease in the nominal price (APL = real price and price in the market = real price + inflation = nominal price).If you understand this, it's enough. Just much over this lol it's as simple as a problem with definitions, no need of graphs nor any diagramSo, after you've understood, it's easy to tell that decrease in inflation doesn't necessarily mean deflation. As it has been above stated, that decrease is called disinflation. It is only deflation when the nominal price goes below the APL Edited December 8, 2011 by Animistic Anaemia Reply Link to post Share on other sites More sharing options...
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