Inflation and Deflation (deflation)

Deflation

Sustained decrease in average price level.

Demand-side deflation

Fall in aggregate demand shifts AD curve left.

Supply-side deflation

Increase in economic capacity shifts LRAS right.

Bad deflation

Caused by falling aggregate demand, often recessionary.

Good deflation

Caused by increased production capacity, beneficial.

Disinflation

Decrease in inflation rate, not prices.

Sticky wages

Resistance to nominal wage cuts by workers.

Real balance effect

Lower prices increase consumption and AD.

Real value of debt

Debt worth more during deflationary periods.

Real interest rates

Interest rates adjusted for inflation; can be positive.

Real wage unemployment

Unemployment caused by rising real wages.

Deflationary spiral

Cycle where deflation causes further deflation.

Consumer spending

Decreases during deflation due to delayed purchases.

Economic growth

Often slows during periods of deflation.

Nominal wage cuts

Actual reduction in workers' money wages.

Aggregate demand (AD)

Total demand for goods and services in economy.

Long-run aggregate supply (LRAS)

Total output an economy can produce sustainably.

Short-run aggregate supply (SRAS)

Total output firms produce at current prices.

Price level

Average level of prices in an economy.

Japan's deflationary experience

Prolonged deflation in Japan during 1995-2014.

OPEC

Organization of Petroleum Exporting Countries; influences oil prices.

Luxury goods

Non-essential items often delayed during deflation.

Debt repayments

Higher percentage of income during deflation.

Consumer expectations

Beliefs about future price movements affecting spending.

Deflationary Spiral

A cycle of falling prices and wages.

Real Interest Rate

Nominal interest rate adjusted for inflation.

Aggregate Demand

Total demand for goods and services in economy.

Deflationary Expectations

Belief prices will fall in the near future.

Right Kind of Deflation

Deflation from efficiency and lower production costs.

Long-Run Aggregate Supply (LRAS)

Represents total output at full employment.

International Competitiveness

Ability to sell goods competitively abroad.

Real Value of Savings

Purchasing power of savings increases during deflation.

Deferred Spending

Postponing purchases due to expected price drops.

Expansionary Fiscal Policy

Increased government spending and reduced taxes.

Quantitative Easing (QE)

Central Bank buys bonds to increase money supply.

Liquidity Trap

Monetary policy ineffective at zero interest rates.

Helicopter Drop

Directly distributing money to consumers.

Announcement Effects

Public declarations influencing economic expectations.

Devaluation

Reducing currency value to boost exports.

Positive Multiplier Effect

Increased spending leads to further economic growth.

Consumer Spending

Expenditure by households on goods and services.

Price Level

Average of current prices across the entire spectrum.

Exchange Rate Changes

Fluctuations in currency value affecting trade.

Purchasing Power

Amount of goods/services one unit of currency buys.

Supply Side Deflation

Deflation resulting from increased production efficiency.

Economic Agents

Individuals or entities making economic decisions.

Real Incomes

Income adjusted for inflation, reflecting purchasing power.

Short Periods of Deflation

Temporary deflation without severe economic impact.

Price Elasticity of Demand (PED)

Responsiveness of demand to price changes.

Consumer Confidence

Optimism regarding future economic conditions.