DEFLATION Flashcards

1
Q

Deflaiton

A

persisten fal in prices in an economu in a year

happens when IR is negative

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2
Q

deflaiton is opposite to

A

inflation

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3
Q

why does deflation seem good 4 reasons consumers

A

g/s cheaper to purchase

boost living standards

incomes go further

inncreased purchasing powert

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4
Q

why does deflation seem good for businesses

A

prices falling

inputs/RM cheaper

can widen profit amrgins as COP falls

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5
Q

what ar ethe two typse of infation

A

demand side

supply side

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6
Q

what is deamdn side deflation aka

A

bad /malignant deflatio

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7
Q

what is suppply side deflaiton

A

good/beningn deflation

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8
Q

on a diagram how do we show deamdn side deflaiton

A

ad shifts left

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9
Q

how do we show supply side deflaion

A

SRAS shifts right

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10
Q

why is deamnd side deflatino bad

A

comes with lower economic growth - lead to cyclical unemp

its often long term and anticipated

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11
Q

explain why deamdn side deflaiton is likely ot be long term and anticipated

A

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

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12
Q

why is supply side deflation good /not so bad

A

comes with hgier econ growht

this is liekly to be st and therfore not anticipated

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13
Q

why is supply side deflation likely to be short tem and not anticipated

A

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

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14
Q

sum up why supply side delation wont last in LT

A

factors cause COP to reduce often dont last in LT

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15
Q

Whats the deeper issue with inflation

A

does it become anticiapted or unanticipated

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16
Q

what type of deflation is danerous

A

LT, anticipated deflaiton

17
Q

if deflatino is anticipated it is

18
Q

if defaltion is anticipated can lead to

A

deflationary spiral

19
Q

give m the 3 point sof why deflation is negative

A

delayed spending

positive real interest raates

increases real value of debt

20
Q

explain delayed spending

A

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

21
Q

how do bs react to delay spedning

A

bs slash price and sicount making defaltion worse and spiral as people wait even

22
Q

what is deflationary spiral

A

when deflaiton continually occuring in eocn

23
Q

deeper condequence of deflation

A

lower growht = higher unemp = reduces SOL

24
Q

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

A

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

25
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
26
why is short term deflatino beneficial
- falling prices for consumers falling input prices for firms
27
explain benefit of falling prices for consumers
buy at thigns at cheaper prices m increases PP , imporves SOL
28
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
29
evaluation poitns
good/bad depedns on whether defaltin is un/anticipated cuase - demand side bad , supply side not too bad