Deflation Homework Answers

The literal meaning of deflation stands for the process of deflating, aka reducing. In Economics, it pertains to the reduction in the monetary value of goods and services. It reduces the over-all price level of products.
A common belief among economists is that deflation impacts hugely in the contemporary world as it raises the actual value of liability; worse, when deflation is unanticipated. The antonym of deflation is inflation, where the purchasing power of money is reduced.
Classification of deflation:
Deflation could be broadly classified in three major areas, which are discussed below.

1. Debt deflation:

It is associated with the termination of long-term credit cycles.

2. Money supply side deflation:

It is caused by the reduction in the velocity of money.

3. Credit deflation:

It is caused when the banks decide to increase the interest rates.
Impact of deflation and how it is bad for the economy:
A deflationary period is bad for the economic health of a nation. To some extent, the general public is delighted when the prices of goods and services are lowered as it enables them to purchase them more. A steep and consistent fall in prices has a negative impact on the overall economy as it discourages the manufacturers to produce more. This leads to a fall in the price of the asset.
It is a vicious cycle when the prices of goods and services go down and lead to reduction in manufacturing, liquidation of inventories, unemployment, increase in debt; thereby causing a total financial meltdown.
A deflation is majorly caused during and after of an economic crisis. It obliges the producers to lower their production and liquidate their assets. This further spreads to consumers and investors alike.
How does the vicious cycle of deflation work?
A deflation cycle or deflationary spiral is a situation when a decrease in price leads to a decrease in production, thereby lowering earnings and demands, ultimately leading to further reduction in prices. This is a cycle which follows and weakens the overall economy. Many believe The Great Depression of the 30s to be a deflationary spiral.
It was believed, until the 1930s, that deflation is self-mending. This was believed so because a reduction in price would let the increase in buying. It was believed that deflation would take care of itself without outside intervention.
However, the creed of self-curing was changed post The Great Depression, and the governments and central banks had to intervene by increasing government spending and reducing taxes.
How does Deflation impact the students of the 21^st century?
Although deflation does not directly impact the students, yet it poses a huge threat indirectly when it comes to deflation homework answers. As a student of economics, I have had my own days with such assignments.
Since it impacts the overall economy of a nation, it demands a lot of attention to detail while working on such assignments. The students are restricting from opting for such topics because of the dread it brings along with it.
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Deflation is unpredictable and could be caused by a plethora of reasons. The major effect of deflation is seen on the market and the producers. At times it could even lead to a total market crash. Hence, it is significant to learn such a crucial topic methodically in schools.
This should be learnt not to secure grades but to learn the market and its behavior because it impacts the whole of the economy of a nation.
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