ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -But the debtors are the losers at a time of deflation. The farmers are the worst hit by deflation because the burden of indebtedness goes up as a result of falling prices.

Detailed explanation-2: -Deflation also has a harmful effect on borrowers because they must pay back loans in dollars that will buy more goods and services (higher purchasing power) than the dollars they borrowed.

Detailed explanation-3: -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-4: -Most debt payments, such as mortgages, are fixed, and when prices fall during deflation, the cost of debt remains at the old level. In other words, in real terms–which factors in price changes–the debt levels have increased. As a result, it can become harder for borrowers to pay their debts.

Detailed explanation-5: -(i) Tax-payers are adversely affected in the deflationary period because due to falling prices, the value of money rises and the real burden of taxation increases. (ii) The government faces an increase in the real burden of public debt.