ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Deflation can be caused by an increase in productivity, a decrease in overall demand, or a decrease in the volume of credit in the economy. Most of the time, deflation is unambiguously a positive trend for the economy, but it can also under certain conditions occur along with a contraction in the economy.

Detailed explanation-2: -Typically, deflation is a sign of a weakening economy. Economists fear deflation because falling prices lead to lower consumer spending, which is a major component of economic growth. Companies respond to falling prices by slowing down their production, which leads to layoffs and salary reductions.

Detailed explanation-3: -Deflation is the general decline of the price level of goods and services. Deflation is usually associated with a contraction in the supply of money and credit, but prices can also fall due to increased productivity and technological improvements.

Detailed explanation-4: -What Causes Deflation? There are two big causes of deflation: a decrease in demand or growth in supply. Each is tied back to the fundamental economic relationship between supply and demand. A decline in aggregate demand leads to a fall in the price of goods and services if supply does not change.

Detailed explanation-5: -Deflation creates incentives to save and postpone spending because prices will be lower and purchasing power greater in the future. This pattern depresses spending and weakens the economy. At the same time, deflation worsens repayment burdens for borrowers, because the burden of repaying debt increases with deflation.