Deflation
- Deflation arising from the supply side can be beneficial
- A fall in the price level as a result of a decrease in the costs of production will enable consumers to buy more goods and services, and increase the country’s international competitiveness.
- Deflation caused by a fall in AD may result in a deflationary spiral
- This lower AD means that firms make less money, so more people become unemployed
- This means that people spend less, which further reduces AD, which repeats the cycle…