Question content area
Part 1
An article by a columnist on bloomberg.com discussed the writing of Silvio Gesell, an economist who lived in Austria during the late 1800s and early 1900s. Gesell had experienced a period of deflation during a recession in Austria in the 1880s. The deflation had "made debts more burdensome, worsening the downturn." Gesell's solution to the deflation was for the Austrian government to enact new rules for its currency. Currency would lose 5 percent of its face value each year, unless the holder of the currency pasted a stamp on the bill. The stamp would cost 5 percent of the face value of the bill. Two years after the program began, a bill would need to have two stamps to be worth its face value, and so on in future years. The columnist states that "Gesell sought to increase the movement of money."
Source: Stephen Mihm, "An Old Tool to Fight a New Recession: Perishable Money,"
bloomberg.com,
April 22, 2019.
a. What is price deflation?
A.
Price deflation occurs when the price level rises from one year to the next.
B.
Price deflation occurs when the money supply grows at the same rate as real GDP.
C.
Price deflation occurs when the price level declines from one year to the next.
D.
Price deflation occurs when the money supply increases at a rate far in excess of the growth rate of real GDP.
Part 2
b. Why does price deflation increase the burden of a debt? Why might increasing the burden of debts make an economic recession worse?
It increases the burden of a debt because it means that the debt must be repaid in money that is
â–¼
increasing
constant
decreasing
in value.
Borrowers will have
â–¼
more
less
money available to buy goods and services, resulting in
â–¼
an increase
a decrease
no change
in consumer spending.
Part 3
c. Use the quantity equation to explain the logic of Gesell's proposal for stamped money. How might the proposal have put an end to a deflation?
Gesell's proposal would
â–¼
decrease
hold constant
increase
the incentive that households and firms have to spend money. The result would be
â–¼
no change
a decrease
an increase
in velocity.
According to the quantity equation, if this result holds true, then for a given level of the money supply and real output, the price level must
â–¼
increase
decrease
remain constant
,
thereby ending the deflation.