Effects of deflation

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ФЕДЕРАЛЬНОЕ АГЕНТСТВО ПО ОБРАЗОВАНИЮ Государственное образовательное учреждение Высшего профессионального образования РОССИЙСКИЙ ГОСУДАРСТВЕННЫЙ ГУМАНИТАРНЫЙ УНИВЕРСИТЕТ ИНСТИТУТ ЭКОНОМИКИ, УПРАВЛЕНИЯ И ПРАВА ФАКУЛЬТЕТ МЕНЕДЖМЕНТ ОРГАНИЗАЦИИ "DEFLATION" Реферат по предмету: АНГЛИЙСКИЙ ЯЗЫК 1-го курса заочной формы обучения Тула, 2010 Content 1. Introduction 2. Causes and corresponding types of deflation 2.1 Money supply side deflation 2.2 Credit deflation 2.3 Scarcity of official money 3.

Effects of deflation 3. Effects of deflation 4. Alternative causes and effects 4.1 The Austrian school of economics 4.2 Keynesian economics 5. Historical examples 5.1 In Ireland 5.2 In Japan 4.3 In the United States 6. Conclusion 7. References 1. Introduction Deflation is a persistent fall in some generally followed aggregate indicator of price movements, such as the consumer price index or the GDP deflator. Generally, a one-time fall in the price level does not constitute a deflation. Instead, one has to see continuously falling prices for well over a year before concluding that the economy suffers from deflation. How long the fall has to continue before the public and policy makers conclude that the phenomenon is reflected in expectations of future price developments is open to

question. For example, in Japan, which has the distinction of experiencing the longest post World War II period of deflation, it took several years for deflationary expectations to emerge. In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the annual inflation rate falls below 0% - a negative inflation rate [1]. This should not be confused with disinflation, a slow-down in the inflation rate. Inflation reduces the real value of money over time; conversely, deflation increases the real value of money - the currency of a national or regional economy. This allows one to buy more goods with the same amount of money over time. Most observers tend to focus on changes in consumer or producer prices since, as far as monetary

policy is concerned, central banks are responsible for ensuring some form of price stability, usually defined as inflation rates of +3% or less in much of the industrial world. However, sustained decreases in asset prices, such as for stock market shares or housing, can also pose serious economic problems since, other things equal, such outcomes imply lower wealth and, in turn, reduced consumption spending. While the connection between goods price and asset price inflation or deflation remains a contentious one in the economics profession, policy makers are undoubtedly worried about the existence of a link [2]. 2. Causes and corresponding types of deflation In the Investment and Saving equilibrium and Money Supply equilibrium model, deflation is caused by a shift in the

supply-and-demand curve for goods and services, particularly a fall in the aggregate level of demand. That is, there is a fall in how much the whole economy is willing to buy and the going price for goods. Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity. Since these idles the productive capacity, investment also falls, leading to further reductions in aggregate demand. This is the deflationary spiral. An answer to falling aggregate demand is stimulus, either from the central bank, by expanding the money supply, or by the fiscal authority to increase demand, and to borrow at interest rates which are below those available to private entities. In more