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What is Deflation?
Deflation is defined in economics as a drop in the general price level of goods and services. Deflation happens when the rate of inflation falls below 0%. (a negative inflation rate). Over time, inflation diminishes the value of currency, but rapid deflation boosts it. This enables for the purchase of more goods and services with the same quantity of currency. Deflation is distinct from disinflation, which is a slowing of the inflation rate, i.e. when inflation falls but remains positive.
Economists typically agree that a sudden deflationary shock is a concern in a contemporary economy because it raises the actual value of debt, especially if the deflation is unanticipated. Deflation can further exacerbate recessions and lead to a deflationary spiral. Some economists suggest that extended deflationary periods are tied to the lack of technical advancement in an economy, because as productivity increases (TFP), the cost of things lowers.
Deflation usually occurs when supply is high (excess production), demand is low (consumption falls), or the money supply falls (often as a result of a contraction caused by reckless investment or a credit crunch) or because of a net capital outflow from the economy. It can also emerge as a result of excessive competition and insufficient market concentration.
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