deinflation

Question 1

what is it

Answer 1

Inflation below 0, general decline in prices of goods and services

Question 2

whats a real life example of this

Answer 2

CPI inflation rate turned negative in April 2015 (-0.1%).
Falling oil prices led to cheaper fuel and energy costs.
Supermarket price wars between Aldi, Lidl, and the Big Four (Tesco, Sainsbury’s, Asda, Morrisons) drove grocery price deflation.

Question 3

what are the 2 causes of deflation (dont deep it)

Answer 3

AD falls

LRAS rises (can be SRAS in some limited cases)

Question 4

what causes bad deflation

Answer 4

demand side shock to the economy

Question 5

what does this cause (3)

Answer 5

Anything that causes a persistent fall in AD (normally a deep recession or depression)

If there is a large NEGATIVE Output Gap (significant spare capacity)

A large, persistent drop in any AD component could cause this e.g fall in I or C or even Xrev

Question 6

what causes good deflation

Answer 6

LRAS rising

Question 7

why does it rise (2)

Answer 7

SSP being used or improvements in international competitiveness.

Question 8

why may consumer spending fall (CoA)

Answer 8

Consumers expect prices to keep on falling so they wait to make purchases which reduces firms output. Consumer spending will decrease which is a key component of AD

If output is decreasing then firms will not have the confidence to invest further reducing AD

Firms reducing output meaning they buy fewer raw materials decreasing supply

Decreased demand for capital goods so capital utilisation decreases

Unemployment increases leading to lower demand for labour so lower consumer spending and consumer confidence