Published on 06-May-2023
Feature |
Inflation |
Deflation |
---|---|---|
Definition | Inflation is a sustained increase in the general level of prices of goods and services over a period of time. | Deflation is a sustained decrease in the general level of prices of goods and services over a period of time. |
Price Level | Inflation is characterized by an increase in the price level of goods and services. | Deflation is characterized by a decrease in the price level of goods and services. |
Money Supply | Inflation is typically caused by an increase in the money supply, which leads to an increase in demand for goods and services. | Deflation is typically caused by a decrease in the money supply, which leads to a decrease in demand for goods and services. |
Purchasing Power | Inflation reduces the purchasing power of money, as prices of goods and services increase. | Deflation increases the purchasing power of money, as prices of goods and services decrease. |
Interest Rates | Inflation leads to an increase in interest rates, as lenders try to protect their returns from the effects of inflation. | Deflation leads to a decrease in interest rates, as lenders try to stimulate borrowing and spending. |
Money Demand | Inflation leads to a decrease in the demand for money, as people try to spend their money before its value decreases further. | Deflation leads to an increase in the demand for money, as people hold onto their money in anticipation of further price decreases. |
Production | Inflation can encourage production, as producers try to take advantage of higher prices. | Deflation can discourage production, as producers try to cut costs and reduce prices. |
Debt | Inflation reduces the real value of debt, as the amount borrowed becomes easier to repay with inflated dollars. | Deflation increases the real value of debt, as the amount borrowed becomes more difficult to repay with deflated dollars. |
Investment | Inflation can encourage investment, as investors seek to protect their assets from the effects of inflation. | Deflation can discourage investment, as investors become wary of investing in an environment of decreasing prices. |
Wage Adjustments | Inflation leads to wage adjustments, as workers demand higher wages to keep up with the rising cost of living. | Deflation leads to wage reductions, as workers accept lower wages to keep their jobs in an environment of decreasing prices. |
Business Cycles | Inflation can be a sign of a healthy economy in the expansion phase of the business cycle. | Deflation can be a sign of an unhealthy economy in the contraction phase of the business cycle. |
Currency Value | Inflation decreases the value of a country's currency in relation to other currencies. | Deflation increases the value of a country's currency in relation to other currencies. |
Economic Growth | Inflation can stimulate economic growth by increasing consumption and investment. | Deflation can hinder economic growth by decreasing consumption and investment. |
Price Expectations | Inflation leads to higher price expectations, as people anticipate further price increases in the future. | Deflation leads to lower price expectations, as people anticipate further price decreases in the future. |
Asset Prices | Inflation can lead to an increase in asset prices, such as real estate and stocks. | Deflation can lead to a decrease in asset prices, such as real estate and stocks. |
Consumer Behavior | Inflation can encourage consumer spending, as people try to buy goods and services before prices increase further. | Deflation can discourage consumer spending, as people hold onto their money in anticipation of further price decreases. |
Central Bank Response | Inflation can be countered by raising interest rates and decreasing the money supply. | Deflation can be countered by lowering interest rates and increasing the money supply. |
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