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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.


Join The Conversation
sldc sldc 8 years
Deflation or negative inflation is already evident. This isn't wholly a bad thing, because we need correction. The problem is when everything is relatively inexpensive, but most people do not have a job/money, then that is a depression. Currently, we are getting more bang for the buck than last year, but if we continue down this path too long, no one will be able to afford to stay in business. The government regulating market signals will not correct the problem, just as it did not during the 1930s. The government even used to kill livestock while people starved in order to artificially raise food prices. No, not a conspiracy, it is history. Let's hope this sort of insanity never happens again.
ilanac13 ilanac13 8 years
i would rather just think about the word deflation rather than depression in the same sentence. when you think about things deflating, you know that it's something that MAN CAN FIX with just a bit of sweat. when there's a depression - it's takes a lot more than that - and it's just 'depressing' for lack of a better word.
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