Deflation

Topics: Inflation, Deflation, Great Depression Pages: 11 (3922 words) Published: November 12, 2010
In economics, deflation is a sustained decrease in the general price level of goods and services.[1] Deflation occurs when the inflation rate falls below zero percent, resulting in an increase in the real value of money — a negative inflation rate. This should not be confused with disinflation, a slow-down in the inflation rate (i.e. when the inflation decreases, but still remains positive).[2] Inflation reduces the real value of money over time, conversely, deflation increases the real value of money. Most economists believe that deflation is a problem in a modern economy because of the danger of a deflationary spiral. Deflation is also linked with recessions and with the Great Depression. Additionally, deflation also prevents monetary policy from stabilizing the economy because of a mechanism called the liquidity trap. However, historically not all episodes of deflation correspond with periods of poor economic growth.

|Contents | |[hide] | |1 Effects of deflation | |2 Deflationary spiral | |3 Causes of deflation | |4 Counteracting deflation | |5 Examples of deflation | |5.1 United Kingdom | |5.2 Deflation in the United States | |5.2.1 Major deflations | |5.2.2 Minor deflations | |5.3 Deflation in Hong Kong | |5.4 Deflation in Japan | |5.5 Deflation in Ireland | |6 References | |7 See also | |8 External links |

[pic][edit] Effects of deflation

In economics, deflation refers to a general reduction in the level of prices below zero percent annual inflation. Deflation should not be confused with a temporary fall in prices; instead, it is a sustained fall in prices that occurs when the inflation rate passes down below zero percent. In the IS/LM model (that is, the Income and Saving equilibrium/ Liquidity Preference and Money Supply equilibrium model), deflation is caused by a shift in the supply and demand curve for goods and interest, particularly a fall in the aggregate level of demand. That is, there is a fall in how much the whole economy is willing to buy, and the going price for goods. Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity - contributing to the deflationary spiral. Since this idles capacity, investment also falls, leading to further reductions in aggregate demand. This is the deflationary spiral. An answer to falling aggregate demand is stimulus, either from the central bank, by expanding the money supply, or by the fiscal authority to increase demand, and to borrow at interest rates which are below those available to private entities. In more recent economic thinking, deflation is related to risk: where the risk adjusted return of assets drops to negative, investors and buyers will hoard currency rather than invest it, even in the most solid of securities. This can produce the theoretical condition, much debated as to its practical possibility, of a liquidity trap. A central bank cannot, normally, charge negative interest for money, and even charging zero interest often produces less stimulative effect than slightly higher rates of interest. In a...

References: | |message until the dispute is resolved. (December 2007) |
Until the 1930s, it was commonly believed by economists that deflation
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