Macroeconomics Term Paper

Is deflation a bad thing? This is a very popular question for many reasons. You may look at the question and think, if deflation is lowering prices how could that possibly be a bad thing. Everybody would love prices to drop, and for many people that do not understand economics, they would think deflation would be beneficial. When in reality deflation happens to affect a lot more than just the prices of goods. Deflation has effects on both the demand and the supply of goods. And it doesn’t only affect the goods being sold it also affects the people buying them. With deflation comes layoffs and pay cuts which in turn affects the consumers. To top it all off with deflating prices don’t change debts so if prices and wages start falling it means less money for consumers, but your debts would not change as a result. Throughout this essay I will go into more depth about why deflation is a bad thing and give some real life examples of what it can do to an economy. One thing that many people do not understand about deflation is that it is the continuous drop in prices. Prices don’t just drop for one week and everyone gets to go on a shopping spree. If you notice a continuous dropping in prices would you buy something now? Or would you wait a month until the prices got lower? That is exactly what happens in a deflating economy, spending is actually reduced. “Spending is really important, since it's the essence of how market participants interact with each other, and delaying it creates a downward spiral” (Weisenthal) Without spending grocery stores wouldn’t interact with the large companies like Coca-Cola and Lays Chips. They would postpone buying, therefore cutting sales with the larger companies. In an article written by Paul Krugman he makes a great point in saying, “After all, when prices are falling, just sitting on cash becomes an investment with a positive real yield.” It is a very true statement, saying that if you don’t spend when money is deflating then you end