Deflation

Question 1

Define Deflation

Answer 1

The persistent fall of prices in an economy in a year

Question 2

Define Deinflation

Answer 2

Deinflation is the persistant decrease in the rate of inflation

Question 3

What are the two types of deflation

Answer 3

Demand side deflation - malign

Supply side deflation - benign

Question 4

How can price deflation be caused in demand side policies

Answer 4

Price Deflation Can be caused by a huge fall in AD – often in a deep recession

Question 5

How can price deflation occur in supply side policies

Answer 5

Price deflation can occur on the supply side due to rapid increases in the productivity of firms, this will decrease costs to the firm and allow them to lower prices.

Question 6

Issues with price deflation

Answer 6

Decreases in consumer spending encourages consumers to delay their spending to get a better deal.

Increased value of debt, as deflation increases the real value of money and the real value of debt.

Unemployment – Due to a rise in real wage and a decrease in AD, firms would lower wages, eventually causing real wage unemployment.

Question 7

How can monetary policy solve price deflation

Answer 7

QE – introduction to an increased money supply, in order for prices to increase

Negative interest rates – causes an incentive to not save rather spend more, therefore increasing AD.

Question 8

How can fiscal policy solve price deflation

Answer 8

Increase Government spending

Lower Direct taxes

Question 9

What are the characteristics of Malign deflation

Answer 9

Long-term and anticipated
Comes with lower growth

Question 10

What are the characteristics of Benign deflation

Answer 10

Comes with higher growth
Short-term and unanticipated