deflation + disinflation

deflation definition

deflation involves a continuous decline in the general level of prices in an economy

disinflation definition

disinflation refers to a slowdown in the rate of inflation meaning prices are still increasing but at a slower rate than before.

benign deflation definition

A fall in the general price level due to growth in aggregate supply causing an outward shift. The economy benefits. Prices fall because goods are cheaper to produce leading to an increase in RGDP thus lower unemployment.

malign deflation

A fall in the general price level caused by a fall in aggregate demand leads to an inward shift in AD. The economy is worse off as there is a decrease in RGDP and thus higher unemployment.

causes of deflation

sippy cups fail producing tears

market supply has increased relative to demand

competition between firms increases so supply increases, as increases

market demand has fallen

labor productivity rises, increasing output, and reducing average costs

technological advancements causing reduction of COP, AS shifts outward

consequences of deflation

drink sprite cutting demand for dolphins patiently
consumers will delay spending decisions as they wait for prices to fall

stocks of unsold goods accumulate

firms cut production and lay off workers

reduce in demand since household income falls as unemployment rises

firms stop investing in new plant and machinery as demand falls reducing growth in teh economy

deep recession can occur as prices go even lower and demand for labor and incomes continue to fall

the real cost of public spending rises but tax revenues will fall since the economic activity has slumped. therefore the government must borrow more money to meet budget expenditure obligations

Policies to deal with deflation

expansionary monetary policy

expansionary fiscal policy

increase money supply

gov starts new projects to create employment