Q:

Why is deflation bad for the economy?

A:

Deflation is bad for the economy because it causes delayed spending, nominal wage cuts, higher interest rates and a higher burden of debt ratio. Deflation is the opposite of inflation and generally causes prices to go down after a recession.

While inflation is a serious issue, many economists consider deflation to be more serious because it is more difficult to control. At first glance, deflation seems like a great thing because it means prices are going down. However, as deflation drives prices down, profits and production decrease. The decrease in profits and production drives wages lower. In more extreme cases, employees are laid off because wages cannot be driven lower.

In addition, unemployment rates rise and people are reluctant to spend their money because the future of the economy is questionable. Furthermore, due to the questionable future of the economy, investments are sold. As more consumers are reluctant to spend their money and build their savings by selling their investments, interest rates plummet. Most importantly, the central bank is forced to evaluate its currency and adjust to the impact of deflation.

Since deflation is a result of inflation, the government attempts to guide the public to spending less and saving more by raising interest rates in times of inflation.


Is this answer helpful?

Similar Questions

  • Q:

    What is the difference between inflation and deflation?

    A:

    Inflation means that the value of money decreases, whereas deflation means that the value of money increases. In a period of inflation, the costs of goods and services increases over time. In a period of deflation, the costs of goods and services decreases over time.

    Full Answer >
    Filed Under:
  • Q:

    Why is the economy important?

    A:

    The economy, as a system of resource use and distribution, is important because resources are finite. Understanding the economy is crucial to political awareness and becoming an informed citizen.

    Full Answer >
    Filed Under:
  • Q:

    What is a diversified economy?

    A:

    A diversified economy is an economy that has a number of different revenue streams and provides nations with the ability for sustainable growth because there is not a reliance on one particular type of revenue. This diversification provides nations with the security and reliability that they need so that if one economic revenue stream should fail, the nation knows that they have several other options for revenue.

    Full Answer >
    Filed Under:
  • Q:

    What is an agrarian economy?

    A:

    An agrarian economy is a type of economy that relies primarily on agricultural industry including livestock farming or crop production. It is a form of economy whose major factor of production is the agricultural land. Prosperity of agrarian economy is also influenced by other factors such adequate rainfall, suitable climate and inputs like fertilizers.

    Full Answer >
    Filed Under:

Explore