I am covering the basics of supply and demand right now in my AP and "regular" economics classes. One of the determinants of demand is "consumer expectations". A common example is to suggest today that we have complete knowledge that the price of a good is going to increase in the near future. How do consumers respond to this information? Well, even high school students know you go out and buy the good TODAY! That increases the demand for the good (shifts the demand curve to the right). Ceterus Paribus (holding all other variables constant), this will cause the market quantity to increase, as well as the price. See graph below:
Currently there is a clog in the process. Business and banks are sitting on piles of money right now and are not spending or lending, repectively. Consumers are hesitant to spend because of an uncertain economy and, to a lesser extent, deflation (one puts off buying today in anticipation of lower prices in the future). All these things contribute to a stagnant economy.
The worry that DEFLATION is the problem of the day. We need to induce a little inflation (by increasing the money supply) AND have the Federal Reserve publicly TELEGRAPH that they are pursuing a moderate (3%?) inflationary policy. The thinking is this will prompt consumers to do just what I illustrated at the beginning of this post, but on an economy-wide basis. Anticipation of higher prices of homes, cars, other consumer goods will incentivize people to go buy today. Consumers and businesses will want to spend dollars that are worth more TODAY than they will be worth in the future.The result will be an increase in the aggregate level of demand for goods/services, a movement to Full-Employment ("FE RGDP") and an increase in the price level, as one would expect. See graph below.
There is lots of controversy about this in the economic blogosphere, and since I am just a simple-minded high school teacher, this is as easy an explanation as I can make. Hey, it gets me through the day...What do you think---Inflation, deflation, leave alone?? Would love to hear from you...