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Causes & Consequences of Deflation | Economics for GCSE/IGCSE - Year 11 PDF Download
Demand-side Deflation
- Deflation occurs when the average price level of goods/services in an economy decreases, as measured by the consumer price index (CPI).
- Deflation is characterized by a percentage change in prices that falls below zero %.
- Deflation can be triggered by factors related to either the demand side or the supply side of the economy.
- The causes of deflation, whether demand-side or supply-side, have distinct impacts on the economy.
Demand-side Deflation (Bad Deflation)
- Demand-side deflation arises from a decline in total (aggregate) demand within the economy.
- Total (aggregate) demand is the culmination of all expenditures in the economy, quantified by real Gross Domestic Product (rGDP).
- rGDP = Consumption (C) + Investment (I) + Government spending (G) + Net Exports (X-M)
- A reduction in any of the four components of rGDP could result in a potential decrease in total demand within the economy, potentially leading to a decline in the general price level.
- This situation indicates the occurrence of demand-side deflation.
The Consequences of Demand-side Deflation
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Supply-side Deflation
Supply-side deflation stems from enhancements in the economy's productive capacity.
- This enhancement occurs through increases in the quantity or quality of factors of production.
- Consequently, it leads to a surplus supply scenario within the economy.
- As a result, general price levels decline, while national output (rGDP) experiences an increase.
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FAQs on Causes & Consequences of Deflation - Economics for GCSE/IGCSE - Year 11
| 1. What is demand-side deflation? |  |
| 2. What is supply-side deflation? | |
Ans. Supply-side deflation occurs when there is a decrease in the cost of production for goods and services in the economy, leading to a decrease in prices. This can be caused by factors such as technological advancements, lower labor costs, or increased efficiency in production processes.
| 3. What are the causes of deflation? | |
Ans. Deflation can be caused by a variety of factors, including a decrease in consumer demand, lower production costs, a decrease in the money supply, or a decrease in government spending. External factors such as global economic conditions or changes in exchange rates can also contribute to deflation.
| 4. What are the consequences of deflation? | |
Ans. The consequences of deflation can include decreased consumer spending, lower business profits, increased debt burdens, and a decrease in economic growth. Deflation can also lead to a decrease in wages, higher unemployment rates, and a general economic slowdown.
| 5. How can policymakers address deflation? | |
Ans. Policymakers can address deflation by implementing measures such as lowering interest rates, increasing government spending, implementing monetary stimulus measures, and encouraging investment in the economy. These measures are aimed at stimulating demand and increasing economic activity to combat deflation.
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Apr 28, 2025
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Document Description: Causes & Consequences of Deflation for Year 11 2025 is part of Economics for GCSE/IGCSE preparation.
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