> This would result in a deflationary spiral (no one spends the money b/c they're better off waiting and letting it appreciate, which leads to less spending, wh

> This would result in a deflationary spiral (no one spends the money b/c they're better off waiting and letting it appreciate, which leads to less spending, which leads to even more deflation, etc.) The deflationary spiral can happen, but not as easily as you think and not when everyone is acting rationally. Let's say the economy (your numerator) is growing by 5% per year. then deflation would also be 5% in your model. If you have a project that returns 10%, you would still spend the money. However, if you have a project that returns 4%, you would keep it. So in you case, it would only be the below-average projects that are not being implemented, which is not such a bad thing as it means that there are more resources left for the high-return projects. If you are aware of an economic model that allows for deflationary spirals under rational expectations, please let me know.