Answer to Question #241710 in Macroeconomics for Frederick

Question

Mention any two negative effects of deflation

Answer 1

Solution:

Deflation refers to a decrease in the general price level of goods and services. It is caused by a fall in aggregate demand and increase in aggregate supply.

The two negative effects of deflation are:

1.). Increase in unemployment levels – This is because of the decreasing price levels; hence producers tend to lower their costs by laying off employees.

2.). Increase in the real value of debts – Deflation is related with an increase in interest rates, which will result in an increase the real value of debt.