DEFLATION

BY
MANMEET KAUR(110069)
 DEFINITION
In simple words, deflation can be termed as a fall
in the general price level.

It is a decline in general price

levels, often caused by
reduction in supply of money
or credit.
It can be brought about by
reduction in government
spending, personal spending,
investment spending.
DEFICIENT DEMAND
o Deficient demand gives rise to a “DEFALTIONARY
GAP” , which causes the economy’s income , output
and employment to decline , thus leading to deflation.
o If aggregate demand is for a level of output less
than the full-employment level , then a situation
of deficient demand arises.
DEFLATIONARY GAP
The deflationary gap is a measure of the
amount of deficiency of aggregate
demand.
The deflationary gap is the difference
between the level of aggregate demand
required to establish full employment
equilibrium and the actual level of aggregate
demand.
 DEFLATIONARY GAP

AS

F AD = C+I

∆
E AD = C+I+∆I
I G

DEFLATIONARY
GAP

45◦
O M Y OUTPUT , INCOME
CAUSES OF DEFLATION
The major causes of deflation are:

Fall in household consumption expenditure.

Fall in private investment demand.
Fall in government expenditure.
Fall in black money.
Fall in deficit financing or money supply
Fall in balance of payments.
EFFECTS OF DEFLATION
The impacts or effects of deflation are:
There is a fall in the general price level.
The producers incur losses or their profits are nil .
There is a fall in the level of production as there are
unsold stock of goods.
Consumers are gainers because have prices have gone
down.
Fall in the level of national income.
Fall in the level of employment.
It will lead to recession and depression in the trade
cycle of an economy.
If there is oligopoly in the economy , the price of the
commodities will remain the same but the level of
production will decline .
MEASURES TO CORRECT
DEFLATION
QUANTATIVE
INSTRUMENTS QUALITATIVE
INSTRUMENTS
BANK RATE
POLICY
MARGINAL
OPEN MARKET REQUIREMENTS
OPERATIONS
MORAL
VARIABLE SUASION
RESERVE RATIO
 D DEFLATIO
DE N IN
INDIA
 What are the causes of deflation in india?
FACTORS CAUSING DEFLATION ARE:
1. The supply of money goes down.

2.The supply of other goods goes up.

3.Demand for money goes up.

4.Demand for other goods goes down.

 EFFECTS OF DEFLATION…
1. Decrease in Aggregate demand

2 Reduction in Velocity of money

3. Devaluation of Currency

4 . Less Investments

5 . Transfer of wealth