ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Deflation leads to a problem of increased unemployment due to slack in demand. Central banks aim to keep the overall price level stable by avoiding situations of severe deflation/inflation. They may infuse a higher money supply into the economy to counter-balance the deflationary impact.

Detailed explanation-2: -Deflation expectations make consumers wait for future lower prices. That reduces demand and slows growth. Deflation is worse than inflation because interest rates can only be lowered to zero. Innovation can cause good deflation.

Detailed explanation-3: -Both inflation and deflation are viewed as economic issues because they will have a negative impact on investments, production, and employment. A high inflation rate is a financial issue because it will significantly reduce consumer demand for goods and services and their purchasing power.

Detailed explanation-4: -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. This further lowers demand and prices.

Detailed explanation-5: -But lower spending leads to less income for producers, which can lead to unemployment and higher interest rates. This negative feedback loop generates higher unemployment, even lower prices and even less spending. In short, deflation leads to more deflation.