Deflation

What are the 2 causes of deflation?

-Falling aggregate demand -Rising productivity

Why is Government debt as a % of GDP likely to rise a cost of deflation?

Deflation can make it more difficult for the government to reduce debt to GDP ratios. Because with deflation they will see falling tax revenues, but the amount of debt they have to pay back stays the same.

Why is less spending a problem of deflation?

Falling prices may deter people from buying goods (they wait for them to be cheaper later); this leads to lower aggregate demand.

Whats the anagram for the problems of deflation?

HM GRDL

Why is Rising productivity a cause of deflation?

If deflation is caused by a fall in costs and rising productivity, then deflation may be beneficial to the economy.

Why is the fact deflation causes Higher real debt burden a problem of deflation?

If prices and wages are falling, then deflation causes the real value of debt to increase. Debt repayments will become a bigger percentage of income. This gives consumers less disposable income and can cause lower AD.

Why is real-wage unemployment a problem with deflation?

If prices fall, but wages stay the same 'sticky wages', it will cause real-wage unemployment. Workers often resist nominal wage cuts because no one likes to see their wages actually cut.

Why is falling aggregate demand a cause of deflation?

If there is a sharp fall in AD, falling output and a rise in unemployment, then this can lead to lower prices and lower wages.

Why is the fact that Monetary policy becomes ineffective a problem of deflation?

Interest rates cannot fall below 0%. If we have deflation, real interest rates effectively increase. Deflation can become difficult for Central Banks to solve because they can't use conventional monetary policy of cutting interest rates.

Why is a deflationary spiral a problem with deflation?

Once prices start falling, it can cause a deflationary spiral. With falling prices, people cut back on spending causing further deflation. It can be difficult for governments to overcome deflation.

What can deflation cause to rise?

Real GDP

Deflation caused by falling AD is good or bad for the economy?

harmful to the economy

What is deflation?

reduction of the general level of prices in an economy.

What does the anagram HM LRRD stand for?

the problems of deflation?

What could deflation lead to thats beneficial to the economy?

your economy may become more internationally competitive, and it could lead to rising exports. (It depends whether other countries are also experiencing deflation.)

What are the problems of deflation?

• Higher real debt burden. • Monetary policy becomes ineffective. • Government debt as a % of GDP likely to rise. • Real-wage unemployment. • Deflationary spirals. • Less spending.