Post
Topic
Board Economics
Re: Is deflation truly that bad for an economy?
by
dinofelis
on 27/03/2015, 14:20:10 UTC
You are obviously trying to push you logic unto real things. Why should their difference be equal to 10%? Just to suit your considerations?

Because nominal interest rate = real interest rate + inflation.

The real interest rate is the cost of borrowing money in real terms.  If we want to see the pure effects of inflation and deflation, we should of course consider the real price of borrowing money in the same conditions.

If you change the economic conditions between the two cases, you are not considering the effects of inflation and deflation any more.   You should change inflation and inflation ONLY ; ceteris paribus.

Otherwise, I could just as well change any other aspect of business arbitrarily and blame inflation or deflation:

"consider 2% inflation and the rent of my work shop is $500 ; now consider 3% deflation and the rent of my workshop is $900" or any other change in business condition.

No, the real cost of borrowing money (the real interest rate) has to remain constant of course.

The real cost of money is the one which will determine if your ROI will  be beneficial or not.  If your ROI is larger than the real interest rate, your activity will be beneficial ; if not, you will suffer a loss.