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Definition: Deflation

Some economists are worried that the US economy is headed toward a period of deflation, which is a widespread decline in prices. Cheaper sounds like a good thing, but deflation affects more than consumer goods.

It could create a dangerous downward spiral, because lower prices can lead to decreased production by businesses that can't afford to produce as much, which in turn leads to higher unemployment and reduced salaries. Eventually, in the worst-case scenario, deflation could cause a depression. Should deflation present itself as a real threat to the US economy, the Federal Reserve can fight deflation through monetary policy.


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