Does the AD/AS model assume deflation whenever AD decreases?

Reply Fri 8 Jul, 2016 09:16 pm
I am somewhat unsure about this.

My textbook does not seem to mention deflation as an expected result of each decrease in AD, though this is what the model suggests. During the last 50 years in North America deflation has not occurred very often. Yet, from 1920-1960 there were 7 deflationary events. Has macroeconomics learned to control deflation?

This could I suppose be explained by Keynesian sticky prices and a flat AS curve along with inflating the economy through money growth. All the same in the not too distant past economies seemed to live with more deflation possibly from reduced AD than is experienced today.

One of the questions in one of my assignments proposes a massive decrease in consumption and investment spending, even while the economy has a small amount of inflation. Is it reasonable to have a nearly 50% decrease in investment spending, and still avoid deflation?
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