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Deflation:
Declining prices. It is the opposite of inflation.
Deflation may be caused by a reduction in the money supply or credit. Deflation may
also be caused also by a decline in investment, personal or government spending.
Declining demand for products may cause deflation.
An oversupply of products could cause deflation generally or in particular commodities
r services. For example: an increase in oil production because of an OPEC decision
r because of the discovery of large oil deposits may result in falling oil prices. In such
case, oil prices would be deflating. OPEC's decision would be considered deflationary.
Severe deflation is dangerous for businesses that have fixed costs. If a company is
eceiving less for it's products, it's profits will fall unless it is able to reduce costs.
ompanies may lay off employees such a deflationary environment. Widespread
eflation can lead to an economic depression as was experienced in the 1930's.
Central banks use may increase the money supply in an effort to prevent severe
eflation. Companies and individuals are especially vulnerable to harm from deflation
If they are heavily in debt. If income falls, but debt service payments remain unchanged,
the debtor may be unable to make payments when due. Falling interest rates can help
debtors survive deflationary times.
Declining prices. It is the opposite of inflation.
Deflation may be caused by a reduction in the money supply or credit. Deflation may
also be caused also by a decline in investment, personal or government spending.
Declining demand for products may cause deflation.
An oversupply of products could cause deflation generally or in particular commodities
r services. For example: an increase in oil production because of an OPEC decision
r because of the discovery of large oil deposits may result in falling oil prices. In such
case, oil prices would be deflating. OPEC's decision would be considered deflationary.
Severe deflation is dangerous for businesses that have fixed costs. If a company is
eceiving less for it's products, it's profits will fall unless it is able to reduce costs.
ompanies may lay off employees such a deflationary environment. Widespread
eflation can lead to an economic depression as was experienced in the 1930's.
Central banks use may increase the money supply in an effort to prevent severe
eflation. Companies and individuals are especially vulnerable to harm from deflation
If they are heavily in debt. If income falls, but debt service payments remain unchanged,
the debtor may be unable to make payments when due. Falling interest rates can help
debtors survive deflationary times.
| What is Deflation? |
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