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    Deflation

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    Deflation

    Uploaded by

    thuyle.31231022560
    5 views3 pages

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    5 views3 pages

    Deflation

    Uploaded by

    thuyle.31231022560

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    DEFLATION

    I. Define
    A. Define:
    Deflation is the general decline of the price level of goods and

    services. Simply put, at this time the rate inflation is negative, the
    shopping cart price is lower than at the benchmark time.
     Deflation is usually associated with a contraction in the supply of
    money and credit, but prices can also fall due to increased
    productivity and technological improvements.
     Whether the economy, price level, and money supply are deflating
    or inflating changes the appeal of different investment options.
    A. Understanding Deflation:
     Deflation causes the nominal costs of capital, labor, goods, and
    services to fall, though their relative prices may be unchanged.
     On its face, deflation benefits consumers because they can
    purchase more goods and services with the same nominal income
    over time.
     However, not everyone wins from lower prices and economists
    are often concerned about the consequences of falling prices on
    various sectors of the economy, especially in financial matters.
     In particular, deflation can harm borrowers, who can be bound to
    pay their debts in money that is worth more than the money they
    borrowed, as well as any financial market participants who invest
    or speculate on the prospect of rising prices.
    I. Cause
    A. Cash flow decline:
     The State Bank/Central Bank uses tightening monetary policy to
    reduce the money supply, with actions such as issuing government
    bonds and increasing deposit interest rates to curb inflation.
     A decrease in money supply causes the value of money to increase.
    When the value of 1 dong increases, the price of goods is also pulled
    down. People tend to save money rather than spend it.
     Therefore, declining consumer demand for products leads to
    deflation.
    B. Aggregate demand decrease:
     Some reasons causing aggregate demand to decrease: the
    government cuts spending, the stock market continuously declines...
     At this time, people tend to save more and the government often
    moves to increase interest rates to tighten monetary policy.
    Therefore, the tendency to save increases and consumer demand
    decreases.
     Pushing prices lower and leading to deflation.
    C. Productivity increases
     Advances in science and technology help companies/businesses
    operate more efficiently.
     Production costs decrease, creating conditions to reduce
    product prices
     This is distinct from but similar to general price deflation, which is
    a general decrease in the price level and increase in the
    purchasing power of money.
    D. The capital structure of companies changes:
     Currently, each type of goods has many suppliers.
     Therefore, businesses continuously have promotional programs,
    discounts and access to new capital structures to attract
    consumers and create competitive advantages over direct
    competitors. Accordingly, product prices tend to decrease.
     The trend of continuous price decline over a long period of
    time leads to deflation.
    II. Impact
    A. Beneficial effects
    1. Output increased:
     When deflation occurs due to technological development
    creating conditions for businesses to boost production,
    output will increase.
     There by, the opportunity to choose and use quality
    goods is also higher.
    2. Improve competitiveness:
     For businesses, deflation creates a freer business
    environment, limiting monopoly and economic manipulation.
     Companies operating in this environment also have the
    opportunity to optimize resources, thereby improving
    competitive efficiency.

    3. Consumers receive great benefits:

    Prices are decreasing, people have access to cheaper but


    higher quality products. With the same amount of money,
    people have more diverse choices.

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