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MENTAL MODEL · M4957

Pigou Effect

Pigou Effect
BusinessHigh supportMacroeconomics
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Version 1.0.0 · Updated 2026-07-30

CORE DEFINITION

A fall in prices (deflation) increases the real purchasing power of money, making holders of cash feel wealthier, thereby increasing consumption, and potentially pulling the economy out of recession. This is a self-regulating mechanism in classical economics.

SCAFFOLDING EFFECT

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An automatic stabilizer in crises. It reminds us that falling prices contain the seeds of a rebound. During market panic declines, the purchasing power of cash holders quietly expands, and when this expansion reaches a critical point, bottom-fishing forces enter the market.

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Pigou Effect (real balance effect): When the price level falls, the real purchasing power of nominal assets such as money held by people increases, enhancing the sense of wealth → consumption increases → aggregate demand and output recover, thus providing a positive mechanism between prices and output (partially offsetting the 'paradox of thrift').

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Source support: Explicit

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    zh.wikipedia.orghttps://zh.wikipedia.org/wiki/%E5%BA%87%E5%8F%A4%E6%95%88%E5%BA%94ZH · Explicit
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