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inflation, deflation, Costs (consequences): 1. Redistribution effects ,,…
inflation
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definition
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Inflation can occur when prices rise due to increases in production costs, such as raw materials and wages.
A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product.
Some companies reap the rewards of inflation if they can charge more for their products as a result of the high deman
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Costs (consequences): 1. Redistribution effects ,
Economists determine the two major causes of deflation in an economy as (1) fall in aggregate demand and (2) increase in aggregate supply.
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A central bank may use a tighter monetary policy by increasing interest rates. Thus, people, instead of spending their money immediately, prefer to save more of it. In addition, increasing interest rates lead to higher borrowing costs, which also discourages spending in the economy.
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Negative events in the economy, such as recession, may also cause a fall in aggregate demand. For example, during a recession, people can become more pessimistic about the future of the economy. Subsequently, they prefer to increase their savings and reduce current spending.
An increase in aggregate supply is another trigger for deflation. Subsequently, producers will face fiercer competition and be forced to lower prices. The growth in aggregate supply can be caused by the following factors:
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A decline in price for key production inputs (e.g., oil) will lower production costs. Producers will be able to increase production output, which will lead to an oversupply in the economy. If demand remains unchanged, producers will need to lower their prices on goods to keep people buying them.
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Advances in technology or rapid application of new technologies in production can cause an increase in aggregate supply. Technological advances will allow producers to lower costs. Thus, the prices of products will likely go down.
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