Week of May 18, 2009
Article: "The Greater of Two Evils," Economist.com, May 9, 2009. Available at http://www.economist.com/opinion/displaystory.cfm?story_id=13610845
This week's article considers the opposing risks to world economies of inflation and deflation and argues that because deflation poses the greater risk at present central banks are right in taking steps to avoid it even if their measures increase the risk of future inflation—a controversial position to be sure. Class discussion can be related to
- Real and nominal interest rates (Chapter 4)
- The Fisher effect (Chapter 5)
- Debt deflation and financial crises (Chapter 8)
- The Fed's balance sheet (Chapter 13) [Alt. Edition Chapter 16]
- Aggregate demand and supply analysis (Chapter 22) [Alt. Edition Chapter 23]
- Inflation (Chapter 24) [Alt. Edition Chapter 25]
- Expectations and policymaking (Chapter 25)
Questions for Discussion
- Define the following terms and phrases used in or related to this article:
- inflation
- deflation
- inflation expectations
- real debt burdens
- negative real interest rate
- What two alternative economic problems does the article discuss?
- Does it tend to agree with Paul Krugman's view on these problems or with Allan Meltzer's?
- What evidence and reasoning does the article present to support its position?
- What two major historical episodes of deflation in the U.S. does the article discuss?
- Which one of these does it describe as benign, and which as malign?
- How does the article distinguish between the two?
- Relate the distinctions the article makes to the aggregate demand and supply model. What shifts on an AD-AS graph illustrate the two types of deflation?
- Which type does the article believe may lie ahead?
- Why does deflation complicate the challenges faced by monetary policymakers?
- Why are many observers quite concerned that inflation will rise? Does the Economist share their concerns? Why or why not?
- Why do the song lyrics quoted at the beginning of the article refer to Zimbabwe and Japan after mentioning inflation and deflation?
Archive of Previous Articles:
Note: Stories will be removed from the archive if the articles are no longer available on the Web.
