An article in the American Free Press quoted Professor Peter Spencer of York University in England as saying, "This printing of money 'will keep the [deflation] wolf from the door." The same article quoted Ambrose Evans- Pritchard, a writer for the London-based newspaper The Telegraph, as saying, "Deflation has ... insidious traits. It causes shoppers to hold back. Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop." a. What is price deflation? b. What does Spencer mean by the statement "This printing of money 'will keep the [deflation] wolf from the door'"? c. Why would deflation cause "shoppers to hold back," and what does Evans- Pritchard mean by saying "Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop"?

Step by step solution

01

Define Price Deflation

Price deflation is a decrease in the general price level of goods and services in an economy over time. When the general price level decreases, with all other things remaining constant, the purchasing power of currency increases. In other words, deflation is the negative inflation rate.

02

Explain the Wolf from the Door Statement

The statement by Professor Peter Spencer can be broken down as follows: the ‘printing of money’ refers to monetary policies, such as those often implemented by a central bank, that increase the supply of money in an economy. The ‘deflation wolf’ metaphorically represents the danger and damaging effects deflation can have on an economy. By saying 'keep the wolf from the door,' Spencer is suggesting that if more money is circulated in the economy (through creation or printing of money), it would help avoid or lessen the impact of deflation.

03

Describe the Effects of Deflation on Consumer Behavior

Deflation can cause 'shoppers to hold back' because as prices decrease, consumers may anticipate that prices will continue to fall even further. This postponing of purchases in hopes of future price decreases leads to lower demand, thereby further exacerbating the deflation. This is what Ambrose Evans-Pritchard was referring to when he mentioned a 'self-feeding spiral that is hard to stop.' Decreased spending leads to further deflation, which then encourages consumers to delay spending even more — the cycle repeats itself and can spiral out of control.

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