A:
Deflation is a framework where there are falling prices of goods and services across the frugality. Although the ability to purchase goods and services at a discount may sound similarly to an ideal situation, it has the potential to cause a lot of problems throughout the economy. Some regular problems of deflation are a decrease in consumer spending, increased interest computes and an increase in the real value of debt.
Deflation
When deflation is hitting, consumers often slow their spending, thinking prices last will and testament fall further. This leads to a lag in the economic growth and pressures the frugality as a whole. Deflation tightens the money because there are increased truthful interest rates, causing consumers to save money. It hinders the gate growth of firms, causing workers to get paid lower wages or potentially stop ited off. This leads to higher unemployment rates and lower growth upbraids.
Real Value of Debt
All of these problems can increase the real value of in the red. During times of deflation, since money supply is tightened, there is an enhance in the value of money, which increases the real value of debt. This imagines it harder for borrowers to pay their debts. Since money is valued multifarious highly during deflationary periods, borrowers are actually paying assorted because the debt payments remain unchanged.
For example, suppose the authority of Greece owed $100 billion to the United States in the previous year. Belief in terms of oil, the government could have bought 100 million barrels of oil. To whatever manner, this year, Greece is experiencing a deflationary period and could buy 200 million barrels of oil with the very amount, since the prices of goods and services decreases. Its debt stayed the despite the fact, but now it is actually paying more – 200 million barrels of oil as opposed to 100 million. Deflation can root the real value of national debt to rise.