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Steve Greenberg
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Try explaining why inflation is bad to all the homeowners that had mortgages whose principal and payments dropped to insignificance over the life of the mortgage as their wages and the value of their house inflated. Or all those people who kept refinancing and pulling the inflation equity out of their houses to use in place of income. Oops, it worked for 70 years until the housing inflation turned negative. Borrowers like inflation. Lenders like deflation until the borrowers can't make the payments anymore. Inflation, whether positive or negative, requires adjustment. If it is slow, most people don;t mind too much. If it is fast, then it may not be possible to make the adjustments fast enough. Or you may spend all your time making adjustments rather than doing useful work. Scientists, and probably economists, like to make the quasi-static assumption because it makes the math much easier. Some times, in real life, things move just to fast for the quasi-static assumption to hold. Then of course there is the all other things being equal clause. Rarely are all other things equal. If this is not emphasized to the student, then the student is left with the question as to why all these models are so valued by economists even though real life does not act that way at all.
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Nov 28, 2011