1. Inflation is usually understood to mean positive inflation – i.e., an increase in the general price level over time. Given this, what do you think “deflation” means?

2. Using the Fisher equation, describe why deflation can be dangerous. In the context of a recession, explain how a potential “deflationary spiral” would work.

3. If you were the Fed Chairman, how would you respond to deflation?

3. Describe clearly the consequences of high government debt with respect to:

(a) Interest rates

 (b) Inflation

(c) Intergenerational equity

(d) Private investment (“crowding out effect”)