Question

Explain the effect of deflation on production and distribution

Answer 1

Deflation occurs when the general price level of goods and services in an economy decreases. Deflation results when the supply of money increases more slowly than the supply of goods and services, which causes the value of money to increase and prices to decrease, since you can buy more with less money.

Answer 2

The effect of deflation:

• It occurs when the overall cost level of goods and services decreases within an economy. When the supply of money rises more gradually than the supply of goods and services, which leads to an increase in the value of money and a fall in prices, as you can purchase more with less income.
• It is a scenario where the falling prices can cause a chain reaction leading to lower productivity, lower wages, and lower demand and even lower price rates.
• The deflation spiral is an important economic challenge during a recession because it further damages the economic situation.

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