Sunday, September 2, 2007

What is Deflation?

In common usage deflation is generally considered to be "falling prices". But there is much more to it than that.

Often people confuse deflation with disinflation or with Depression (as in "the Great Depression"). These three terms are related but not synonymous.

According to the definition of Deflation is "a decline in general price levels, often caused by a reduction in the supply of money or credit.

Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy. The opposite of inflation."

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