Your uncle who worked for forty years as a plastic surgeon is now retired. Since his retirement he has become very interested in political economy and has taken Micro and Macro Principles at the local college. Lately, he has become very interested in understanding the macroeconomic consequences of inflation and deflation. Your uncle believes that microeconomics is guided by fundamental economic principles but does not believe that the same is true for macroeconomics. In fact he believes that macroeconomics is mostly a set of anecdotes. As a budding macroeconomist you find this view bothersome and would like to convince your Uncle that his view of macroeconomics is misguided. Given his current interest in deflation and inflation, you decide to write a memo to him that convincingly demonstrates that analysis of the macroeconomic consequences of inflation and deflation is in fact guided by fundamental economic principles.
At a minimum your memo should include answers to the following questions. In all cases your answers should be carefully reasoned and supported by economic theory and logic and by empirical evidence whenever such evidence exists. The following questions/issues are not intended to be exhaustive. It is very likely (even desirable) that your research will suggest other issues/questions that your paper should address.
Exactly what is deflation? Exactly what is inflation?
What are the causes of inflation and deflation?
Identify the fundamental principle or principles that should guide efforts to analyze the macroeconomic consequences of inflation and deflation.
Identify and explain the costs of deflation. For each cost you identify, carefully and thoroughly explain the exact sense in which it reflects the fundamental principle you identified.
Identify and explain the costs of inflation. For each cost you identify, carefully and thoroughly explain the exact sense in which it reflects the fundamental principle you identified.
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