Deflation

Question 1

what is deflation?

Answer 1

deflation is the general fall in the average price level of goods and services

Question 2

When does price deflation occur?

Answer 2

Price deflation happens when the rate of inflation becomes negative

Question 3

How may deflation relate to AD?

Answer 3

there may be a long recession which leads to excessive spare capacity in the industry.

Question 4

what other side events may cause deflation?

Answer 4

• technological improvements
• falling wages
• better productivity
• higher exchange rates reducing import prices

Question 5

How may deflation be caused in terms of AD and AS graphs?

Answer 5

• The AD curve shifting LEFT

- The AS curve shifting RIGHT

Question 6

Consequences of deflation?

Answer 6

• Holding back on spending (consumers postpone demand)
• the real value of debt rises
• the real cost of borrowing increases
• falling asset prices hits personal sector wealth and confidence
• lower profit margins