Question

Define inflation and deflation? And explain what causes each?

Answer 1

inflation occurs when an economy becomes overheated and grows too quickly. Inflation can lead to increased uncertainty and other negative consequences which include:

Cuts in interest rates

Increased money supply

Higher wages

Devaluation (imports become more expensive)

Declining productivity

Increase in VAT taxes

Inflation expectations/speculations Increased property prices (not a cause but closely related)

Deflation can be caused by a combination of different factors, including having a shortage of money in circulation, which increases the value of that money and, in turn, reduces prices; having more goods produced than there is demand for, which means businesses must decrease their prices to get people to buy those goods; not having enough money in circulation, which causes those with money to hold on to it instead of spending it; and having a decreased demand for goods overall, therefore decreasing spending

Inflation refers to a general price increase across the entire economy. Deflation is a rapid fall in the price of goods and services across the entire economy