Deflation refers to a persistent fall in the general price level of most goods and services.
Since price falls, the value of money rises during deflation.
Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the real value of money over time; conversely, deflation increases the real value of money – the currency of a national or regional economy. This allows one to buy more goods and services than before with the same amount of money.
CAUSES OF DEFLATION
- Excess supply over demand
- Restriction on bank lending
- Excessive use of budget – surplus
- Increase in taxation
- Under – population
- Excessive price control
EFFECTS OF DEFLATION
- Fall in price of goods and services
- Reduction in profit
- Decrease in investment
- Fixed income earners will gain
- Money lenders gain at the expenses of borrowers.
- Reduction in production
- Encourages export of goods
- Discourages importation
- Increase in value of money
HOW TO CONTROL DEFLATION
- The adoption of an expansionary monetary policy by the central bank.
- Use of deficit – financing by the government
- The government could reduce taxation on incomes
- A physical measure of controlling deflation is to increase the wages or salaries of the people.
- Reduction in taxes.
Assignment (Post your answer and question title using the box below for evaluation and discussion)
Write short note on the following:
- Inflationary gap
- Open inflation
- Price instability