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What is deflation? How can a government act, in case the economy is in a state of hyper-inflation?

Economics Dec 14, 2020

What is deflation? How can a government act, in case the economy is in a state of hyper-inflation?

Expert Solution

Deflation refers to the general reduction in pricing points for goods and services in an economy. Subsequently, the purchasing power of the currency in question surges. This phenomenon might be caused by:

  • A decrease in the total supply of money
  • A decrease in aggregate demand
  • Increased production that leads to a great amount of goods and services available in the economy

Deflation seems to benefit consumers as they are able to purchase more with the same income they had. However, not everyone wins; borrowers, in particular, lose a bit of value since they are bound to repay their debts in amounts worth more in real value than they had borrowed.

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