Glossary of Finance Terms - Deflation |
Deflation
: Deflation is a negative inflation
rate and refers to a decrease in the overall
price or cost of goods and services. While
inflation reduces the actual value of money,
deflation increases the value of each unit
of currency but is usually seen as a negative
result of a poor economy where there has
been a decrease in the money supply and
less credit lending. Where general prices
may rise or fall, deflation is the actual
shift of supply and demand in the economy
of most goods and services.
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As demand
falls, prices follow and as prices fall,
often times consumers wait to purchase.
This, in turn, reduces the ability for companies
to produce products due to lack of funds.
A reduction in finances leads to pay cuts,
layoffs, and downsizing which often exacerbates
the deflation problem. This feedback loop
is considered a primary factor in the deflationary
spiral.
Deflation can sometimes result in this deflationary
spiral when demand decreases and prices
drop, delaying most economic transactions,
slowing down economic growth and investments.
Deflation is sometimes the result of extended
recessions
or economic depressions
where people are less inclined to spend
money.
Also called : Deflationary Economy,
Deflated.
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