Question

Macroeconomics explanation question

Does deflation result in the unexpected redistribution of wealth between borrowers and lenders?

Write a paragraph to explain and support your answer.

Answer 1

Yes, deflation result in the unexpected redistribution of wealth between borrowers and lenders.

Deflation is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy. During deflation, the purchasing power of currency rises over time.

Lenders are helped by unanticipated deflation because the money they get paid back has more purchasing power than the money they expected it to be when they loaned it out.

Borrowers are hurt by deflation in particular because they have to pay back their debts with money worth more than the money they borrowed in the first place!

Most policies that target inflation are aimed at maintaining small and predictable rates of inflation. Inflation that is too close to zero runs the risk of becoming negative, and deflation becomes a possibility. Deflation has a very damaging impact on an economy and is associated with particularly severe recessions and depressions. If policymakers about to "lowering inflation," their objective is slowing down the rate of inflation not deflation.