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Unit 3.2 Deflation

Deflation is a state of economic imbalance characterized by falling prices, increased unemployment, and reduced output due to a decrease in effective demand and money supply. It negatively impacts producers and leads to lower aggregate demand, while favoring creditors and fixed-income groups. To combat deflation, monetary and fiscal measures such as lowering interest rates, tax reliefs, and public works programs are recommended.

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18 views5 pages

Unit 3.2 Deflation

Deflation is a state of economic imbalance characterized by falling prices, increased unemployment, and reduced output due to a decrease in effective demand and money supply. It negatively impacts producers and leads to lower aggregate demand, while favoring creditors and fixed-income groups. To combat deflation, monetary and fiscal measures such as lowering interest rates, tax reliefs, and public works programs are recommended.

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Simrata Jeswani
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DEFLATION

“DEFLATION IS THE STATE OF DISEQUILIBRIUM IN WHICH A


CONTRACTION OF PURCHASING POWER TENDS TO CAUSE
OR IS THE EFFECT OF A DECLINE OF THE PRICE LEVEL”
MEANING OF DEFLATION:

• Deflation is just the opposite of Inflation. It is mainly caused by a shrinkage in the total
effective demand as a result of the diminution in the quantity of money.
• In short, deflation implies the deficiency of demand.
• It should be remembered that, each and every fall in the prices cannot be called
deflation.
• As the price decline after the peak inflation point cannot be termed as deflation. (as a
result of anti-inflationary policies)
• It is characterized by
➢Falling prices
➢Increase in unemployment
➢Reduction in output
➢Fall in money income
EFFECTS OF DEFLATION:

• The producers may have to suffer loses as the prices of their products fall more
rapidly as compared to the cost of production.
• To control the cost of production, there may be high rate of unemployment.
• Unemployment leads to lower amount of Income and which ultimately results in fall of
aggregate demand .
• Deflation favours the creditors, , holders of fixed interest bearing securities, renters
and the fixed income group.
CONTROL OF DEFLATION:

• Cheap monetary policies will be adopted: lowering the bank rate, purchase of
securities in the open market, lowering of cash reserve ratio and liberal credit
control measures.
• Fiscal measures: to increase the private investments, the government can give tax
reliefs, tax concessions and other allied facilities.
• Redistribution of Income in favour of poor class to increase the marginal
propensity to consume.
• In case of failure of monetary and fiscal policies, the programme of public works are
undertaken, which increases the public expenditure and income of the people, too.

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