Question content area

Part $1$

An article by a columnist on bloomberg.com discussed the writing of Silvio$$ Gesell, an economist who lived in Austria during the late $1800$s and early $1900$s$.$ Gesell had experienced a period of deflation during a recession in Austria in the $1880$s$.$ The deflation had$$ "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

$$

$$

increasing

constant

decreasing

in value.

Borrowers will have

$$

$$

more

less

money available to buy goods and$$ services, resulting in

$$

$$

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$\text{'}$s proposal would

$$

$$

decrease

hold constant

increase

the incentive that households and firms have to spend money. The result would be

$$

$$

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

$$

$$

increase

decrease

remain constant

$,$

thereby ending the deflation.