Volume 6, No. 4 (Winter 2003)
It seems odd that economists would find the idea of falling prices to be a bad thing. Likewise, it is peculiar that policymakers would fear deflation and be willing to take drastic measures to insure the so-called “defeat” of deflation. Policymakers and politicians, after all, would supposedly want the general public—their constituency—to experience the beneficial effects of falling prices over time. Lower prices create a gain of utility or satisfaction for consumers, who can either purchase more of a good or use the money saved to buy larger quantities of other goods. Deflation thus has the same effect as an increase in income.
