Deflation, And The Consequences Of A Falling Economy Of Prices

Firstly Inflation is an upward movement in the average level of prices. Its opposite is deflation, a downward movement in the average level of prices. The boundary between inflation and deflation is price stability. Inflation can either be negative or positive; it could mean making products more expensive. There are a number of effects of inflation that can

Deflation is a decline in the volume of available money or credit that results in lower prices, and, therefore, increases the buying power of money.

Some of you might not know what deflation means. Deflation means that prices go down on goods, but deflation is not good. When products of prices go down usually the business suffers and they have to fire people or give them lower wages.

Inflation describes the increases in the average price and deflation is the decrease of the average price. Both inflation and deflation are the percentage rate that changes the price index and hurts the value of real money. Inflation is an increase in the general price of goods and services over a period of time. Unexpected inflation benefits the borrowers and hurts the lenders. Inflation is the reduction in purchase power. Inflation affects the value of money. Inflation or deflation is the percentage change of price index, once these calculations take effect we can use the (CPI) consumer price index and is widely used in the United States to level out price changes. Normal values are converted to real values by dividing the price index.

The downward spiral of the United States economy can be caused by different factors. For example, record high gas prices and sub prime mortgage loans are tow key contributors. With the United States gas prices and unemployment rates at an all time high, it is no secret why consumers naturally spend less money. Consumers are using more money for their gas tanks just to get to work everyday, and the though of going on vacation or shopping is just a dream now for most. A higher price level reduces the purchasing power of the public's accumulated savings account balances (Aggregate demand and aggregate supply, 2012). A higher price level heavily wears out the purchasing power of such assets, the general public is much poorer and will automatically reduce its spending.

One of the most consistent defenses against deflation is for a central bank to target an inflation rate greater than zero. The Federal Reserve’s current inflation target is 2% and has informally been at that rate for quite some time. This nonzero target provides a cushion for policymakers: should inflation decrease due to an unexpected shock to aggregate demand, prices should not immediately start falling. This allows policymakers to act with easy money when inflation reaches 1 or 0%, thus avoiding deflation. Yet, during the last two recessions in the United States, the 2% inflation rate did not prevent significant fear of deflation. Extraordinary action was required, and many economists argue that the low interest rate policy following the 2001-2002 recession contributed to the housing bubble that was inflating at that time. It is not yet known what the impact will be from the unorthodox policies taken in response to deflation fears in 2009-2010. Based on these experiences, it may be time to consider alternative inflation targets to provide greater insulation from deflationary pressures.

The economy has been turbulent over the last few years, to say the least. Nearly everyone has been affected in one way or another. The article entitled “U.S. Consumer Prices Held in Check in January” describes the current economic situation in the United States and even abroad. At one point in time deflation was among the many concerns on everyone’s mind, but the article states that deflationary worries can now be a thing of the past. In fact, consumer prices are now on the rise which can largely be tied to rising energy prices. There are many macroeconomic indices which are touched upon in the article. The primary focus of the article is consumer price index (CPI), which has increased $1.6% over the last twelve months (Hauser, 2011). In

Noting deflation as the main course of the great depression seems rudimentary, although a valid main cause, one must understand it was not the only main cause for the economic crisis in the United States. If we do consider it as the main and fundamental cause of the great depression, we can justify our reasoning due to the spiral effect deflation has on consumer behavior, banks and even government economic policy. Deflation is defined as a decrease in the price of goods and services. One can assert that due to deflate the public would consider their money more valuable from one day to the next as deflation increases. As money becomes an investment itself, this results in less consumer spending on unnecessary goods, which expectedly results in less profits for businesses, and even lower employment to cover costs. As unemployment rises and less individuals are making money an increase in defaulted debt is seen alongside fewer issuing of loans for new businesses. Deflation, not only causes lower prices for goods, but it also increases the value of a prior debt and lowers consumer demand in general.

From the results, the effect inflation had on the savings, made the total price required to purchase the car increase by nearly $2,000 in three years. The new monthly repayments increased by $51.50 per month over a three year time period. These increases due to inflation are realistic, as a three per increase over three years isn’t much.

The relationship between inflation and unemployment is a topic, which has been debated by economists for decades. It is this debate that has made the opinions about it evolve. In this essay, the controversial topic will be discussed by viewing different economists’ opinions on that according to time sequencing.

In order to close this inflationary gap, the government should use deflationary FP. By decreeing government spending (G), (therefore decreasing injections into AD), or increasing taxes (T), (increasing withdrawals from the economy), disposable income of the population can be reduced, and in turn AD can be decreased. In figure 3 the inflationary gap is shown, with the gap a-b displaying E>Y and c-d displaying W>J at the full employment level of national income. Other uses of FP include changing the tax system to provide more incentives to increase AS, or to alter the distribution of income, again through increases in T. One major problem with FP is that it is severely affected by time lags. Inflation is difficult to forecast, and in order to smooth out the business cycle, policy must be implemented at the right time, and with the necessary magnitude. If the policies implemented fail to work within these two limits, they could extend a boom period of unstable growth, or deepen a recession further, and so must be carefully implemented. These policies all work to combat inflation; however they could all prove detrimental to the British economy in it’s present state.

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.

Hyperinflation as the word suggests is a situation where inflation is excessively high. This phenomenon has many consequences in an economy. Through history, there has been numerous cases of hyperinflation that have had negative repercussions in the economy of these countries and the international market. In the actuality, Venezuela has the highest inflation rate in the world. Due to various political and economic problems, Venezuela’s inflation rate for the year of 2015 was of 180.9% ("Venezuela | Economic Indicators") which is extremely high compared to other countries. The South American country is living a stage of political division, social problems and alarming economic rates. Many attribute these problems to the political decisions of the current and former presidents, Nicolás Maduro and Hugo Chávez respectively, who have been involved in various rumors for corruption. For instance, Maduro achieved the approval of a law that permits him to legislate above the Venezuelan National Assembly, who is the legislative power of the country. This change, allowed him to make decisions over the market, controlling things such as price, profit and exchange rates, while inflation was constantly rising. The president argued that this decisions were made to ensure freedom and economic rights. Furthermore, other factors in the international market also affected Venezuela. The decrease in the price of the petrol affects them directly since a high percentage of their economy is based

. If the United Kingdom leaves the British EU will push capital away from the region and toward a safe haven market including Japan and the United States Treasuries. This will raise relative currency values and interest rates which will further lower the market. A higher Japanese Yen and United States dollar are negative to both economies export sectors. This will be unhelpful in the case of Japan because it will reinvigorate decades of deflation in the economy. China will receive pressure from the higher U.S. dollar it will be caught in between its two largest export markets the United States and the European Union. The strong inflation services on tradable goods for the United States will negatively impact domestic demand trends on

On the other hand, a deflationary (contractionary) fiscal policy is vividly understood when the economy has an ‘inflationary gap’. An inflationary gap is when the aggregate demand exceeds the productive