PIGOU EFFECT
A term in economics referring to the relationship between consumption, wealth, employment and output during periods of deflation. Defining wealth as the money supply divided by current price levels, the Pigou effect states that when there is deflation of prices, employment (and thus output) will be increased due to an increase in wealth (and thus consumption).
Alternatively, with the inflation of prices, employment and output will be decreased, due to a decrease in consumption.
Also known as the "real balance effect."
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