Inflation—Deflation

Inflation - Shoe Production Increases

(Increasing Money Supply)

Shoe Production Increases

Shoe Production Increases 2.00%/Month
Wheat Production Fixed 0.00%/Month
Money Supply Increases 0.50%/Month

In this scenario shoe production increases while the money supply steadily increases.

Inflation-Deflation

Because shoe production increases, shoe sales increase, as you would expect. Shoe dollar prices, however, rise when, based on production increases, you would expect them to decline. This gives evidence of the countervailing influence of the growth of money on dollar prices.

Dollar prices for wheat also give confusing signals. They rise while production remains flat.

Direct Exchange

Inflation-Deflation

The direct exchange relationship behaves as you would expect, given an increase in shoe production.

With only two examples we begin to see the disruptive effects money growth has on dollar price signals.

Next we'll look at decreasing shoe production.