Deflation

• What is deflation?

  Deflation is the persistent fall in prices in an economy.
• How does deflation relate to inflation?

  Deflation is the complete opposite of inflation.
• What happens to consumer purchasing power during deflation?

  Consumer purchasing power increases as prices fall.
• What is the effect of deflation on businesses?

  Deflation can lead to cheaper inputs and raw materials for businesses.
• What are the two types of deflation?

  The two types of deflation are demand-side deflation and supply-side deflation.
• What is another term for demand-side deflation?

  Demand-side deflation is also known as bad deflation.
• What is another term for supply-side deflation?

  Supply-side deflation is also known as good deflation.
• How does demand-side deflation occur?

  Demand-side deflation occurs when aggregate demand shifts to the left.
• How does supply-side deflation occur?

  Supply-side deflation occurs when aggregate supply shifts to the right.
• Why is demand-side deflation considered bad?

  Demand-side deflation is considered bad because it can lead to lower economic growth and long-term anticipated deflation.
• What is a potential consequence of anticipated demand-side deflation?

  Anticipated demand-side deflation can lead to a deflationary spiral.
• What behavior do rational consumers exhibit during anticipated deflation?

  Rational consumers delay their spending during anticipated deflation.
• What happens to aggregate demand when consumers delay spending?

  When consumers delay spending, aggregate demand decreases.
• What is the effect of deflation on real interest rates?

  Real interest rates will always be positive during deflation.
• How is the real interest rate calculated?

  The real interest rate is calculated as the nominal interest rate minus the inflation rate.
• If the nominal interest rate is 0% and the inflation rate is -2%, what is the real interest rate?

  The real interest rate is 2%.
• What happens to consumer behavior when real interest rates are positive?

  Consumers are incentivized to save rather than borrow and consume.
• What is the impact of increased saving on aggregate demand?

  Increased saving leads to a reduction in aggregate demand.
• How does deflation affect the real value of debt?

  Deflation increases the real value of debt.
• Why does falling income make it harder to service debt during deflation?

  Falling income makes it harder to service debt because the debt remains a fixed value.
• What is a consequence of businesses becoming averse to taking on debt during deflation?

  Businesses becoming averse to debt leads to reduced investment and consumer spending.
• What can prolonged deflation lead to in an economy?

  Prolonged deflation can lead to lower growth and higher unemployment.
• What historical examples illustrate the dangers of deflation?

  Japan since the 1990s and Greece since 2010 illustrate the dangers of deflation.
• When is deflation considered beneficial?

  Deflation is considered beneficial when it is short-term and not anticipated.
• What is the key factor in determining whether deflation is good or bad?

  The key factor is whether the deflation is anticipated or unanticipated.
• What are the consequences of anticipated deflation?

  • Delayed consumer spending
  • Decreased aggregate demand
  • Potential deflationary spiral
  • Lower economic growth
  • Higher unemployment
• What are the consequences of unanticipated deflation?

  • Short-term benefits for consumers
  • Lower prices for goods and services
  • Increased purchasing power
  • Reduced costs for businesses
  • Potential for economic growth