Economic Effects Of Deflation

In the article, the author talks about the economic effects of deflation in several aspects: goods and services market, consumption and investment, unemployment rate, and debt. Initially, the author clams that deflation drives a fallen price in consumer market which causes of “hoarding cash”, and “delaying purchases”. For instance, despite the fact of the cut-price fuel benefits consumers, deflation causes some negative effects in the economy. Also, the falling price boosts the purchasing power in short run which causes the part-time worker raises in the labor force, and leads unemployment rate fall. At the end of the article the author shows the falling price suspends the investment and makes the debt become impassible to pay. This essay will …show more content…
But how will unemployment rate change during the deflation period? Before talking about the unemployment rate, let’s talk about investment first. People know the money will worth less in the future by inflation, due to the Fisher Equation, which is the real interest rate equals to the nominal interest rate minus inflation rate. When inflation raises, the real interest rate falls as a result. Thus people choose either invest in something that will returns more to balance inflation, or they purchase some fixed assets to store their wealth. However, when people know that money will worth more in the future, the risk-averse people will consider to save the money rather than invest or consume something. Therefore, the national output will fall due to the investment and consumption falls (Y = C + I + G + NX). Another way to explain the nation output falls can be illustrated by AD-AS mode. The deflation leads a negative shock in aggregate demand, therefore the AD curve shifts to the left, both of the price level and real national output falls. From the above points of view, there will be an economic recession due to the falling national output. Therefore, when the price level and national output falls, as a result the unemployment rate …show more content…
When the price and wage falls, the debt is harder to paid than before. The vast majority of debt contracts are denominated in normal currency, which means the change of price level is not considered by the amount agreement. Because, most of the debtors will not consider the risk of deflation. Therefore, in the event of deflation, the burden of the debt will increase for the borrowers . Then according to Fisher Equations, when the nominal interest rate fixed, the lower inflation will affect to a higher real interest. Therefore, the debtor bears a heavier burden than before, and the real wealth of debtor will fall. Considering of the inflation, deflation is even worse. According to the Keynes conjectured, the debtors have a higher marginal propensity to consume than the creditors. Because the creditor tends to consume less and save more, in order to invest the money in debtors, as a result they have a large proportion of savings. When deflation impairs debtors’ wealth, the decline in consumption will makes debtors suffers more than the

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