DEFLATION

Question 1

Deflaiton

Answer 1

persisten fal in prices in an economu in a year

happens when IR is negative

Question 2

deflaiton is opposite to

Answer 2

inflation

Question 3

why does deflation seem good 4 reasons consumers

Answer 3

g/s cheaper to purchase

boost living standards

incomes go further

inncreased purchasing powert

Question 4

why does deflation seem good for businesses

Answer 4

prices falling

inputs/RM cheaper

can widen profit amrgins as COP falls

Question 5

what ar ethe two typse of infation

Answer 5

demand side

supply side

Question 6

what is deamdn side deflation aka

Answer 6

bad /malignant deflatio

Question 7

what is suppply side deflaiton

Answer 7

good/beningn deflation

Question 8

on a diagram how do we show deamdn side deflaiton

Answer 8

ad shifts left

Question 9

how do we show supply side deflaion

Answer 9

SRAS shifts right

Question 10

why is deamnd side deflatino bad

Answer 10

comes with lower economic growth - lead to cyclical unemp

its often long term and anticipated

Question 11

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

Answer 11

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

Question 12

why is supply side deflation good /not so bad

Answer 12

comes with hgier econ growht

this is liekly to be st and therfore not anticipated

Question 13

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

Answer 13

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

Question 14

sum up why supply side delation wont last in LT

Answer 14

factors cause COP to reduce often dont last in LT

Question 15

Whats the deeper issue with inflation

Answer 15

does it become anticiapted or unanticipated

Question 16

what type of deflation is danerous

Answer 16

LT, anticipated deflaiton

Question 17

if deflatino is anticipated it is

Answer 17

dangerous

Question 18

if defaltion is anticipated can lead to

Answer 18

deflationary spiral

Question 19

give m the 3 point sof why deflation is negative

Answer 19

delayed spending

positive real interest raates

increases real value of debt

Question 20

explain delayed spending

Answer 20

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

Question 21

how do bs react to delay spedning

Answer 21

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

Question 22

what is deflationary spiral

Answer 22

when deflaiton continually occuring in eocn

Question 23

deeper condequence of deflation

Answer 23

lower growht = higher unemp = reduces SOL

Question 24

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

Answer 24

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

Question 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

Answer 25

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

Question 26

why is short term deflatino beneficial

Answer 26

• falling prices for consumers

falling input prices for firms

Question 27

explain benefit of falling prices for consumers

Answer 27

buy at thigns at cheaper prices m increases PP , imporves SOL

Question 28

Explain falling input prices for firms

Answer 28

buy RM and inputs at lower price

reduing COP

widening profit margins

can increase investmetn as got more profit = more AD more econ growht

Question 29

evaluation poitns

Answer 29

good/bad depedns on whether defaltin is un/anticipated

cuase - demand side bad , supply side not too bad