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Deflation

Deflation is the economic condition where the overall price levels of goods and services decline over time, increasing the purchasing power of money. While lower prices might seem beneficial to consumers, but prolonged deflation can negatively affect the economy. It typically results from a drop in demand, an oversupply of goods, or a contraction in the money supply. Businesses may experience lower profits, leading to layoffs and reduced wages, exacerbating economic stagnation. Deflation is particularly dangerous for economies because it discourages spending.

Example

During the Great Depression, deflation gripped the economy as consumer demand collapsed, causing widespread price drops and mass unemployment.

Key points

• Deflation is a sustained decrease in the general price levels.

• It increases the value of money but can harm economic growth.

• Causes businesses to reduce production, leading to job losses.

Quick Answers to Curious Questions

While lower prices can be beneficial in the short term, prolonged deflation can lead to reduced spending, lower wages, and economic stagnation.

Deflation is typically caused by a drop in consumer demand, oversupply of goods, or contraction of the money supply.

Deflation causes lower revenues, forcing businesses to cut costs, which often leads to layoffs and reduced production.

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