In: Business and Management

Submitted By lucyrjshi
Words 407
Pages 2
Define Deflation
Deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). This should not be confused with Disinflation; a slow-down in the inflation rate (when inflation declines to lower levels such as 1%). Inflation reduces the real value of money over time; conversely, deflation increases the real value of money. This allows one to buy more goods with the same amount of money over time.
Economists generally believe that deflation is a problem in a modern economy because of the danger of a deflationary spiral, which leads to depression.
A longterm recession is a depression and depression leads to deflation to the economy.
Deflation is caused by a shift in the supply-and-demand curve for goods and services, particularly a fall in the aggregate level of demand. That is, there is a fall in how much the whole economy is willing to buy, and the going price for goods. Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity. Since this idles the productive capacity, investment also falls, leading to further reductions in aggregate demand. This is the deflationary spiral. * A GDP based on the prices that prevailed when the output was produced is called unadjusted GDP, or nominal GDP. * A GDP that has been deflated to reflect changes in the price level is called adjusted GDP, or real GDP. * A GDP price index is a measure of the price of a specified collection of goods and services, called a "market basket," in a given year as compared to the price of an identical (or highly similar) collection of goods and services in a reference year. * A nominal GDP is deflated by a GDP price index to obtain a real GDP when prices rise and is…...

Similar Documents