what is deflationary effect?

1 ANSWERS

1. Guest4987
   

   In economics, deflation refers to a general reduction in the level of prices below zero percent year-on-year inflation. Deflation should not be confused with a temporary fall in prices; instead, it is a sustained fall in prices that occurs when the inflation rate passes down below zero percent.
   
   Deflation is generally regarded negatively, as it causes a transfer of wealth from borrowers and holders of illiquid assets, to the benefit of savers and of holders of liquid assets and currency. In this sense it is the opposite of inflation (or in the extreme, hyperinflation), which is a tax on currency holders and lenders (savers) in favor of borrowers and short term consumption. In modern economies, deflation is caused by a collapse in demand (usually brought on by high interest rates), and is associated with recession and (more rarely) long term economic depressions.
   
   Since deflationary periods favor those who hold currency over those who do not, they are often matched with periods of rising populist sentiment, as in the late 19th century, when populists in the United States wanted to move off hard money standards and back to a money standard based on the more inflationary (because more abundantly available) metal silver.

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