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Deflation is the opposite of inflation and is characterized by falling prices. It leads to a declining level of employment, output, and income as producers face losses from higher costs of production compared to lower prices. To control deflation, governments can implement measures like redistributing income to lower-income groups with a higher propensity to consume, inducing more investment, providing subsidies to the poor, lowering interest rates to increase the money supply, and using deficit financing to raise aggregate demand. Government policies aim to shift the IS-LM curves outward through monetary and fiscal policies.

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89 views1 page

Final Submission

Deflation is the opposite of inflation and is characterized by falling prices. It leads to a declining level of employment, output, and income as producers face losses from higher costs of production compared to lower prices. To control deflation, governments can implement measures like redistributing income to lower-income groups with a higher propensity to consume, inducing more investment, providing subsidies to the poor, lowering interest rates to increase the money supply, and using deficit financing to raise aggregate demand. Government policies aim to shift the IS-LM curves outward through monetary and fiscal policies.

Uploaded by

abhishek_balgot2144
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

WHAT IS DEFLATION:

Deflation is just the opposite of inflation. It is essentially a matter of falling prices. Deflation, according to Prof. Paul Ensign is a state of disequilibrium in which a contraction of purchasing power tends to cause, or is the effect of, a declining of the price level. In short, deflation is a condition of falling prices, accompanied by the decreasing level of employment, output and income. . Deflation adversely affects the level of production, investment activity, employment, and income level in an economy. During deflation, when .prices are falling rapidly but the cost of production does not fall correspondingly, producers incur heavy losses and curtail employment and output. This causes aggregate income to fall and aggregate demand to decrease.

GOVERNMENT MEASURES TO CONTROL DEFLATION:


There can be an increase in the MPC(Marginal propensity to consume) if there is a redistribution of income from the rich to the poor. There should be measures taken to induce INVESTMENT. Increasing the Income-Tax rate for the rich people. Providing subsidies to the poor, i.e. BPL people. Inducing public investment by infusing social overhead capital and other forms of financial help to the corporate sector. Lowering the rate of interest by increasing the money supply. Government should emphasize more on borrowing rather than on taxation. Effective Monetary and Fiscal Policies and a right combination of both. Measures to raise the aggregate-effective demand by inducing people to spend most on consumption and less on investment. Deficit financing can be another method.

The above diagrams represent a model of the IS-LM curve and their changes when there is an increase in the Interest rate and the Money demand function.

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