What is meant by deflation? What causes deflation? Is deflation is good or bad? advantages, disadvantages, and effects of deflation in brief

What is meant by deflation? What causes deflation?

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Do you know what is deflation and what are the causes of it? IN this article we will discuss what exactly is deflation and its main causes and related term in brief.

Let’s jump into the topic!

What is meant by deflation?

Deflation refers to an increase in the value of money in relation to the product it will buy. It is also known as the opposite of inflation. IN inflation the value of the money decreases but in deflation the value of the money increases.

deflation is the case in which too little money chasing too many products. Deflation is a state in which the value of money is rising i.e. prices are falling associated with falling productive activity and unemployment in the economy.

It is caused when prices are falling more than proportionately to the output of goods and services in the economy as a result of a decrease in the money supply.

4 main causes of deflation

It is generally believed that spiraling contraction in the money and credit. And the deficiency in total spending is an important factor in causing a fall in the price level. Here we will discuss the 4 main causes of deflation as follow:

What causes deflation?

1. Contraction of supply of money and credit

The main cause of inflation is a contraction of the supply of money and credit. When there is a contraction in the supply of money, it causes inflation.

2. Increase in the tax rate

Similarly, If the tax rate increases, disposable income decreases and leads to deflation occurs.

3. Increase in output

An increase in output is also the main cause of deflation. when aggregate supply increases, it leads to deflation.

4. Decrease in Government expenditure

In the same way, When government expenditure decreases, the income decreases, and then this will lead decrease in demand. So, an increase in government expenditure is also the main cause of deflation.

What is meant by deflation? What causes deflation?

What are the effects of deflation?

The main effects of deflation are it will increase unemployment in the economy, lead to lower production, lower wages, a lower price level of the product, as well as reduce the demand for goods and services.

Advantages and disadvantages of deflation

The main advantages of deflation are that consumers get an advantage in the short run, which leads to the restructuring of the market in an economy, an increase in a higher standard of living, and so on.

The main disadvantages of deflation are that it will lead to lower demand, lower value of the fixed assets, creates unemployment, less investment, reduce demand, and so on.

What Happens During Deflation?

During deflation, the value of money is rising prices are falling associated with falling productive activity and unemployment in the economy. It leads to the case i.e. too little money chasing too many products.

Is deflation good or bad for an economy?

Typically, deflation is bad for the economy because consumers can spend lower due to the fall in prices, which is the main source of economic growth. It also leads to many problems like unemployment, reduce demand, lower price of products, and so on.

Conclusion:

As we discussed above deflation is a state in which the value of money is rising i.e. prices are falling associated with falling productive activity and unemployment in the economy.

This is the case of lower money chasing too many products.

An increase in the tax rate, output, decrease in government expenditure, contraction of credit and supply of money, and so on are the main causes of deflation.

The main advantages of deflation are that consumers get an advantage in the short run, which leads to the restructuring of the market in an economy, an increase in a higher standard of living, and so on.

But there are many disadvantages of deflation i.e. it will lead to lower demand, lower value of the fixed assets, creates unemployment, less investment, reduce demand, and so on.

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