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Deflation
Is a fall in price levels usually caused by a fall in demand. However deflation further depresses demand. With falling prices consumer confidence tends to be low. Consumers believe that the price of goods will be cheaper in the future and so withhold consumption. This can cause a lack of business confidence and so lowers investment. Although interest rates are usually very low with deflation borrowers actually have to pay back more; the borrowing rate plus the rate of deflation.

Page last updated on 20/10/13

 
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