Question

What is deflation? Different methods to control deflation.​

Answer 1

Explanation:

What Is Deflation?

The Great Loss In Reduction Of General Level of Economy

How Can We Control Deflation

1.Lowering bank reserve limits.

2.Open market operations.

3.Lowering the target interest rate.

4.Quantitative easing.

5.Negative interest rates.

6.Increase government spending.

7.Cut tax rates

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Answer 2

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DEFLATION: In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%. Inflation reduces the value of currency over time, but deflation increases it. This allows more goods and services to be bought than before with the same amount of currency.

Different methods to control DEFLATION are:

• Reduction in Taxation:

The government should reduce the number and burden of various taxes levied on commodities. This will increase the purchasing power of the people. As a result, the demand for goods and services will increase. Moreover, sufficient tax relief should be given to businessmen to encourage investment.

• Redistribution of Income:

Marginal propensity to consume can be raised by a redistribution of income and wealth from the rich to the poor. Since the marginal propensity to consume of the poor is high and that of the rich is low, such a measure will help increasing the aggregate demand in the economy.

• Repayment of Public Debt:

During deflation period, the government can repay the old public debts. This will increase the purchasing power of the people and push up effective demand.

• Public Works Programme:

The government should also directly undertake public works programme and thus increase expenditure in public sector. Care should, however, be taken that the public works policy of the government does not adversely affect investment in the private sector; it should supplement, and not supplant, private investment. For this, it is important that only those projects should be selected for the government’s public works policy, which is either too big or not so profitable to attract private investment.

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