Deflation Flashcards
1
Q
What is deflation?
A
The persistent fall of prices in an economy over a period of time.
2
Q
Why is demand side deflation bad?
A
- Comes with lower growth
- Long term
- Anticipated
3
Q
What are the causes of demand side deflation?
A
- Decrease in AD
4
Q
What are the effects of demand side deflation?
A
- Delayed spending
- Positive real interest rates➡️ incentive is to save as the value of money increases as price of goods decreases
- Increases real value of debt➡️ if prices decrease, firms make less TR. This makes it harder to service debts + consumers/firms are dorced to take on more debt to increase consumption
5
Q
Why is supply side deflation good?
A
- Higher economic growth
- Short term
- Unanticipated
6
Q
What are the causes of supply side deflation?
A
- Improved productivity of labour and capital
- Falling wage rates
- Strong exchange rates causing causing import prices to fall causing short run shift outwards
- Technology advancements reducing unit costs
7
Q
What are the effects of supply side deflation?
A
- Decreased prices for consumers➡️ increases QOL and purchasing power
- Falling input prices for firms➡️ decreases their cost of production and increases their TR
