Deflation Flashcards
What is deflation?
A persistent fall in the general price level of goods and services.
What happens to the rate of inflation during deflation?
The rate of inflation becomes negative.
What are two factors contributing to deflation in Japan?
- Very high levels of saving and low levels of consumption
- Taxes were raised in 1997
What impact do bad loans have on banks during deflation?
They tie up capital needed to invest in growth.
How does the yen carry trade affect Japan’s economy?
It keeps the value of Japan’s currency high relative to the dollar and other global currencies.
What is Japan’s debt to GDP ratio mentioned in the text?
200 percent.
What are the potential consequences of price deflation?
- Holding back on spending
- Debts increase
- The real cost of borrowing increases
- Lower profit margins
- Confidence and saving decline
- Income distribution issues
How does deflation impact consumer spending?
Consumers may postpone demand if they expect prices to fall in the future.
What happens to the real value of debt during deflation?
The real value of debt rises.
What effect does deflation have on borrowing costs?
Real interest rates will rise if nominal rates do not fall in line with prices.
What are the long-term effects of lower prices on businesses?
It can lead to reduced revenues and profits, resulting in higher unemployment.
How does deflation affect income distribution?
It leads to a redistribution of income from debtors to creditors.
True or False: Deflation can make exporters more competitive.
True.
What is a deflationary spiral?
A situation where deflation leads to reduced economic activity, further lowering prices.
Fill in the blank: Deflation can lead to a _______ of income from debtors to creditors.
[redistribution]
