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Economics A Level (DONEEEEEEE)

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Question:

Why is Deflation bad?

Author: eric_galvao



Answer:

-Hoarding is Boasted as Consumers will delay their Purchases in expecting Prices to Fall. This leads to Consumption falling, which means Firms have to Lower Prices. Japan’s Consumer Spending fell by 1.7% from 1997-2003 -Doom loop of falling Prices and Wages. Firms may have to lower Wages as Prices are forced to Tank as Profits are not High enough. -Central Bank can’t use Interest Rates [If already low] to encourage Consumption and thus traps the Economy in a Liquidity Trap


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