ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Deflation is associated with an increase in interest rates, which will cause an increase in the real value of debt. As a result, consumers are likely to defer their spending.

Detailed explanation-2: -Deflation reduces production of goods and services due to reduction in demand for goods and services from the consumers. Reduction in production of goods and services leads to reduced investments, reduction in the salaries of employees, and also increase unemployment.

Detailed explanation-3: -The essence of debt deflation is that when prices and wages fall with the price level, but the nominal size of debts and interest payments are fixed, then borrowers face increasing pressure on their ability to repay. This in turn leads to a leap in loan defaults, which in turn can cause bank insolvencies.

Detailed explanation-4: -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.