Deflation Definition
Deflation Definition
Deflation is defined as a decrease in the general price level.
- It is a negative inflation rate.
Deflation means the value of money will increase. - Deflation is often associated with periods of negative or stagnant economic growth (Great Depression, Japanese economy in 1990s, early 2000s). In fact deflation is often used to express a declining economy
AD AS Diagram Showing Deflation
Deflation is considered harmful to economy because
- People delay spending, hoping prices will be cheaper next year
- Workers resist nominal wage cuts, therefore, real wages rise causing real wage unemployment.
- Real interest rates become too high. Even interest rates of 0% cannot induce people to spend creating a liquidity trap.
- Deflation increases the burden of debt
However, if deflation is caused by rising productivity, improved technology and lower costs, the deflation may not be harmful but beneficial
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