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  • Created by: FunkyFrog
  • Created on: 07-06-14 18:25
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  • Deflation
    • Deflation
      • A fall in prices
      • Negative inflation rate
    • Increased productivity (benign deflation)
      • Good for economy: LRAS1 -> LRAS2
      • Reduction in price: Increase in REAL GDP
    • Decreasing AD
      • Lower AD - Reduces price level
    • Problems of deflation:
      • If prices are falling, consumers will delay spending for the 'best deal' a year later. This will reduce AD/reduce economic growth. This will reduce business confidence
    • Monetary policy is ineffective because you cannot reduce interest rates below 0%
      • Interest rates may be too high; restricting AD
    • Workers are very reluctant to accept a nominal wage cut. Therefore firm's may need to increase real wages more than they would like. This leads to real wage unemployment
    • The burden of debt increases. AD decreases as firms and consumers try to pay their burdens


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