DEFLATION Flashcards
Deflaiton
persisten fal in prices in an economu in a year
happens when IR is negative
deflaiton is opposite to
inflation
why does deflation seem good 4 reasons consumers
g/s cheaper to purchase
boost living standards
incomes go further
inncreased purchasing powert
why does deflation seem good for businesses
prices falling
inputs/RM cheaper
can widen profit amrgins as COP falls
what ar ethe two typse of infation
demand side
supply side
what is deamdn side deflation aka
bad /malignant deflatio
what is suppply side deflaiton
good/beningn deflation
on a diagram how do we show deamdn side deflaiton
ad shifts left
how do we show supply side deflaion
SRAS shifts right
why is deamnd side deflatino bad
comes with lower economic growth - lead to cyclical unemp
its often long term and anticipated
explain why deamdn side deflaiton is likely ot be long term and anticipated
if AD shifts left and casues recession
they just dont disappear , they take time and last for a while
so deflaiton resulting and could last for long even if policies help try get econ out o recession
take time to work
so deflaitno coudl be LT and anticipated
why is supply side deflation good /not so bad
comes with hgier econ growht
this is liekly to be st and therfore not anticipated
why is supply side deflation likely to be short tem and not anticipated
due to lwoer RM prices - they could fall but easily go back up again so takeaway deflation
strong ER - so lwoer imports have led to delation but ERnot strong forever . relativley volatile and could weaken soon and taleaawy deflation
sum up why supply side delation wont last in LT
factors cause COP to reduce often dont last in LT
Whats the deeper issue with inflation
does it become anticiapted or unanticipated
what type of deflation is danerous
LT, anticipated deflaiton
if deflatino is anticipated it is
dangerous
if defaltion is anticipated can lead to
deflationary spiral
give m the 3 point sof why deflation is negative
delayed spending
positive real interest raates
increases real value of debt
explain delayed spending
rational consuemrs delay sedning
dont buy norw as know prices will fall even further down the line , so buy when prices hit rock bottom
this is bad for econ
reduces consumption
reduces AD
how do bs react to delay spedning
bs slash price and sicount making defaltion worse and spiral as people wait even
what is deflationary spiral
when deflaiton continually occuring in eocn
deeper condequence of deflation
lower growht = higher unemp = reduces SOL
explain deflatin and positive real interest rates
what is the equstion or real IR
IR cna only fall to 0
what does this mean for real IR
money is gainng x even if
what increases for consumers and business
what is the incentive now and why
what does this do to AD , and unemp
real IR = nominal IR - inflaiton
IR cna only fall to 0%
If IR 0% ans deflation = -2%
0–2%= +2
money is gianing vlaue if prices in eocn rfalling
vlaue and purchasing pwoer increasing , even if not getting a nominal IR
SO IF ir ALWAYS +VE INCENTIVE IS TO SAVE
not borrow and ocnsume/invest
saving makes more rational sense
so more saving less borrowing
C and I reduce even further
more deflation , lower growth , higher unemp
explain hwo inflation increases real value of debt
prices falling so what does this mean for profits and Y
why are profits lower
are lower incomes acc fine
having lower Y and prof makes it harder to
what kind of value is debt
if ive got 2000k motrg , what doesnt delfaion do
but what does it make it harer to do if Y falliing + for business if what is fallign
what is the resukt of consumer and businesses
what happens to AD
and what doe this lead to
prices falling in econ means profits for bs and inome rfor workers fall also
profits fal cause consumers are delaying speding, prices falling so lower rev = lower proits
lower incomes fine as match prices in econ
lower profit and Y make it harder to service debt
debt is a fixed vaue
hh w mortage 200k , deflation doent change tha value , but if Y are falling harder to service debt for hh and businesses if profits falling
so consumers and bs become more averse to taking on dent
if not much borrowing , not much spending and investmetn
decreasing AD - lower groeth higer unemp
deflationary spitral - bad consequecnes
why is short term deflatino beneficial
- falling prices for consumers
falling input prices for firms
explain benefit of falling prices for consumers
buy at thigns at cheaper prices m increases PP , imporves SOL
Explain falling input prices for firms
buy RM and inputs at lower price
reduing COP
widening profit margins
can increase investmetn as got more profit = more AD more econ growht
evaluation poitns
good/bad depedns on whether defaltin is un/anticipated
cuase - demand side bad , supply side not too bad
