Deflationary spiral | Inflation | Finance & Capital Markets | Khan Academy
-
0:01 - 0:06So in a normal economy
we know that employment -
0:06 - 0:09will drive overall demand.
-
0:09 - 0:13If we have high employment
or low unemployment, -
0:13 - 0:15then people are going
to have more jobs, -
0:15 - 0:16and they're going to
have higher wages, -
0:16 - 0:17and that will have
higher demand. -
0:17 - 0:19Or if the other way goes
around, if they lose their jobs, -
0:19 - 0:21demand is going to go down,
wages will start to go down, -
0:21 - 0:24and people aren't going to
have money in their pockets. -
0:24 - 0:27So employment drives demand.
-
0:27 - 0:28And we can view the
demand-- and I'm -
0:28 - 0:31making a huge
simplification here-- -
0:31 - 0:34demand will drive production.
-
0:34 - 0:36Or maybe we could
think of it as supply. -
0:36 - 0:43It'll drive supply, and it
can also be a driver of price. -
0:43 - 0:46And of course, there is a little
bit of a negative feedback -
0:46 - 0:48loop for both of these things.
-
0:48 - 0:51If the demand is high
and the price goes high, -
0:51 - 0:53that might produce a little
bit of negative feedback -
0:53 - 0:54on the demand.
-
0:54 - 0:57Instead of an arrow, this line
here means negative feedback. -
0:57 - 0:59I'll put a little
negative sign here. -
0:59 - 1:02And let's say the demand is high
and then the supply goes high. -
1:06 - 1:08Well actually, the
supply going high -
1:08 - 1:10would drive the
price going down. -
1:10 - 1:13So maybe I should draw a
negative feedback like here. -
1:13 - 1:16High supply would
mean lower price. -
1:16 - 1:18But that's not what I want
to focus on in that video. -
1:18 - 1:20And we could keep
adding more lines here. -
1:20 - 1:23But this is roughly
simple take on it. -
1:23 - 1:27But the general idea
is supply and price -
1:27 - 1:31will then drive corporate
profits, or just profits -
1:31 - 1:33in general, even for an
individual business owner. -
1:33 - 1:39And then profits are
going to drive employment. -
1:39 - 1:40Now, let's imagine a scenario.
-
1:40 - 1:45We are in a bad economy, maybe
a depression-like economy. -
1:45 - 1:46So in that situation,
you could start really -
1:46 - 1:48at any point in this circle.
-
1:48 - 1:49I'll just start at employment.
-
1:49 - 1:52So let's say employment
is really low. -
1:52 - 1:55That's going to make
demand really low. -
1:55 - 1:57And if demand is
really low, then supply -
1:57 - 2:00is going to go down, and
price is going to go down. -
2:00 - 2:02And then that's going
to make profits go down. -
2:02 - 2:04And that's going to make
employment even lower. -
2:04 - 2:08And so what we find ourselves
in this kind of recessionary -
2:08 - 2:10or depression area
environment, this -
2:10 - 2:12would be called a
deflationary spiral. -
2:17 - 2:19And it's a spiral
because a bad economy -
2:19 - 2:21is driving lower
prices, which is -
2:21 - 2:23in turn driving a bad economy.
-
2:23 - 2:26And to make matters worse, if
this continues long enough, -
2:26 - 2:28or if these price declines
are severe enough, -
2:28 - 2:30you could imagine
people saying, look, -
2:30 - 2:32I have this dollar in my pocket.
-
2:32 - 2:34I'm not going to spend
this dollar because, one, I -
2:34 - 2:38might lose my job
at any moment, and I -
2:38 - 2:40know that that dollar is
becoming more powerful, -
2:40 - 2:43that I can buy more
every minute that I wait. -
2:43 - 2:45So as the price goes down,
so as all of this scary stuff -
2:45 - 2:48happens-- so the
employment is going down, -
2:48 - 2:51profits are going down,
prices going down-- this -
2:51 - 2:55makes people not
hoard goods the way -
2:55 - 2:57that they would do in
an inflationary spiral. -
2:57 - 2:59But it makes them hoard money.
-
3:02 - 3:05And why it's ultra scary
for central bankers -
3:05 - 3:07or for governments
is they start to not -
3:07 - 3:09have as much control
over the economy. -
3:09 - 3:10They can't just run
the printing press -
3:10 - 3:13and try to stimulate the
economy in this situation, -
3:13 - 3:16because if they did people are
so conservative right now-- -
3:16 - 3:17You could imagine
maybe a depression -
3:17 - 3:19is going on for years
and years and years. -
3:19 - 3:22And let's say that they take
some type of a helicopter-- -
3:22 - 3:24And this isn't how you actually
distribute money to the money -
3:24 - 3:27supply, but it's just to
show an extreme example. -
3:27 - 3:29So they take a
helicopter, and they -
3:29 - 3:30start dumping cash on people.
-
3:30 - 3:33They print cash, and they
start dumping it on people. -
3:33 - 3:37So every man, woman, and child
in the country gets a $10 bill. -
3:37 - 3:40Well, if people are really
scared and really afraid, -
3:40 - 3:41they're just going
to take that $10 bill -
3:41 - 3:43and stuff it into
their mattress, -
3:43 - 3:44and it's not going
to change anything. -
3:44 - 3:46That dollar isn't
going to actually enter -
3:46 - 3:47into the money supply.
-
3:47 - 3:50The velocity on it will be 0.
- Title:
- Deflationary spiral | Inflation | Finance & Capital Markets | Khan Academy
- Description:
-
Basics of a deflationary spiral. Created by Sal Khan.
Missed the previous lesson? Watch here: https://www.khanacademy.org/economics-finance-domain/core-finance/inflation-tutorial/deflation-tutorial/v/deflation-despite-increases-in-money-supply?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets
Finance and capital markets on Khan Academy: Prices don't always go up. They often go down. This might seem like a good thing, but it could be disastrous for a modern economy is it goes too far. This tutorial explains what deflation is, how it happens and what the effects of it might be.
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Subscribe to Khan Academy: https://www.youtube.com/subscription_center?add_user=khanacademy - Video Language:
- English
- Team:
Khan Academy
- Duration:
- 03:51
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Fran Ontanaya edited English subtitles for Deflationary spiral | Inflation | Finance & Capital Markets | Khan Academy | |
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Fran Ontanaya edited English subtitles for Deflationary spiral | Inflation | Finance & Capital Markets | Khan Academy |