asdeeee
- Created by: FunkyFrog
- Created on: 07-06-14 18:25
View mindmap
- 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
- Deflation
Comments
No comments have yet been made