Chapter 13, Problem 12AA

To determine

To ascertain the significant variations between inflation and deflation.

Explanation of Solution

Inflation is a measure of whether prices of products are increasing rapidly in the economy. Inflation is caused when there is a higher demand for commodities, resulting in a decrease in supply. Supplies can be decreased for a variety of reasons; major calamities can wipe out food crops, a building boom can drain supplies to houses, and so on. Deflation happens when too many commodities are produced or when there is a shortage of money to buy those commodities. The effect is a lowering of the prices for services and goods. As a specific model of a car becomes popular, for example, other manufacturers are beginning to produce a similar vehicle in order to compete with it.

Points of difference:

• Inflation occurs when there is an increase in the general price level in the economy while deflation strikes when general price level decreases.
• A moderate rate of inflation is considered to be helpful for the growth of the economy while deflation is considered to be bad for the same.
• Inflation can cause income inequalities while deflation hampers the productive capacity of nation by reducing investments.

Economics Concept Introduction

Introduction: There are three inflationary factors. The first inflation, push-pull, happen when demand greater than supply. The second is inflation by cost-push, which occurs when the flow y of production is restricted while demand remains the constant . A decrease in demand triggers deflation.