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consequences of inflation and deflation

Deflation is a decrease in the general price level of goods and services. Keynes felt that as long as there were unemployed resources in the economy a moderate or a mild dose of inflation might be in order; because this would lead to waves of optimism inducing businessmen to invest more.But this cannot go on forever because the limit is set by full employment ceiling, after which the prices start rising and moderate inflation starts assuming the nature of hyper-inflation which, in turn, has disastrous consequences on production.It distorts the smooth functioning of price mechanism, hinders capital formation, stimulates speculative activities and hoarding, leads to misallocation of productive resources.In short, inflation invites business to seek profits via manipulation of markets rather than via efficient production.Inflation has the effect of redistributing income because prices of all factors do not rise in the same proportion. Consequences of inflation. Entrepreneurs, therefore, react to it by curtailing the volume of production and hence employment goes down generating a full-fledged depression.Different kinds of investors are affected differently by inflation and deflation. The effects of Deflation are immense on the economic conditions of a particular nation. A deflationary spiral is a downward price reaction to an economic crisis leading to lower production, lower wages, decreased demand, and still lower prices. Inflation is when prices rise, and deflation is when prices fall. Moreover, they gain because the prices of their inventories (stock) go up.Again, they generally being borrowers of money for business purposes, stand to gain. During a recession, the deflation spiral is a significant economic challenge because it further worsens the economic situation.For additional learning, CFI offers a wide range of A decrease in the general price level of goods and servicesLearn 100% online from anywhere in the world. It can be difficult to spot because all prices don't fall uniformly. True enough, inflation didn't spread. The Fed usually only addresses general inflation.


Deflation can lead to unemployment because when companies make less money, they react by cutting costs in order to survive.

Put another way, deflation is negative inflation. On the other hand, the creditors get less in terms of goods and services than what they had lent and stand to lose to that extent. This includes closing stores, plants, and warehouses and laying off workers. Investopedia uses cookies to provide you with a great user experience. The The law of supply depicts the producer’s behavior when the price of a good rises or falls.The Federal Reserve, more commonly referred to as "The Fed," is the central bank of the United States of America and is the supreme financial authority behind the world’s largest free market economy.An interest rate refers to the amount charged by a lender to a borrower for any form of debt given, generally expressed as a percentage of the principal.An economic indicator is a metric used to assess, measure, and evaluate the overall state of health of the macroeconomy. As prices rise, the government has to spend more on goods and services including raw materials for carrying through their project.

During inflation when the prices rise (and the real value of money goes down), the debtors pay back less in real terms than what they had borrowed, and thus, to that extent they are gainers. Speculators, hoarders, black marketers and smugglers stand to gain on account of windfall profits.Changes in the value of money also result in the redistribution of wealth partly because during inflation there is no uniform rise in prices and partly because debts are expressed in terms of money. Consistent fall in the general price level in the economy (deflation) might not be good news for the economy. By definition, monetary deflation can only be caused by a decrease in the supply of money or financial instruments redeemable in money. Deflation is when prices fall.
Inflation Inflation is the general and sustained rise in the level of prices of goods and services in an economy over a period of time. It is considered an adverse economic event and can cause many negative effects on the economy, including:During deflation, the unemployment rate will rise. The USD/CAD exchange rate is affected by economic and political forces on bothThe law of supply is a basic principle in economics that asserts that, assuming all else being constant, an increase in the price of goods will have a corresponding direct increase in the supply thereof. Unfortunately, the Fed didn't raise interest rates during the housing boom in 2005.

Further, there is a lag between a rise in the price level and a rise in wages.

Economic indicatorsGross National Product (GNP) is a measure of the value of all goods and services produced by a country’s residents and businesses. By using Investopedia, you accept our

The fifth type, galloping inflation, is when prices rise 10 percent or more a year. One can invest in bonds and debentures which yield a fixed rate of interest income or one can invest in real estate or equities (shares) whose returns (dividends) rise and fall with profits earned by the companies concerned. During overall deflation, you can have inflation in some areas of the economy. As we’ve seen, it has tangible and often devastating consequences for the economy. When it occurs, the value of currency grows over time. To the extent investors are able to diversify their investment, they can protect themselves from the effects of the fluctuation in prices.Farmers gain during inflation. Prices drop in response, giving companies less profit. It is observed that the deflation increases the power of purchasing and increase the value for the money whereas the inflation cause the decrease in the economic power. Producers will be able to increase production output, which will lead to an oversupply in the economy. If the workers are organized, they may not suffer much during inflation but if they are unorganized like the agricultural labourers, they may suffer more, as they may not find it easy to get their wages increased. While it may seem like lower prices are good, deflation can ripple through the economy, such as when it causes high unemployment, and can turn a bad situation, such as a

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