Answer to Question #233288 in Macroeconomics for georgina

Question

mention any two negative effect of deflation

Answer 1

Negative effects of deflation include;

• Decline in demand

When prices of goods start to fall, consumers will hold money hoping to buy more in the future with only a few coins. This is also influenced by decrease in the money supply in the economy.

• Reduced investment levels

A decrease in prices of goods leads to a reduction in business profits while the amount owed remains the same. This increases the debt burden hence investors avoid taking more risks by failing to venture into the market.