It is defined as persistent fall in price level. During deflation the goods and services become less and less expensive in average, as value of money increases with decrease in price level. The deflation can be defined as the persistent rise in value of money too. Deflation is long term fall in price level. The temporal fall in price level is not said to be deflation. Fall in price level should be for more years to be deflation. The deflation is caused by less aggregate demand than aggregate supply. During deflation, the goods and services demanded in the country are less than goods and services supplied. If aggregate demand is less than aggregate supply due to any reason, the price level falls the process continuously takes place till the aggregate demand remains less than aggregate supply.
Causes of deflation
- decrease in income level
- decrease in population
- decrease in remittance
- decrease in propensity to consume
- decrease in government expenditure
- decrease in export and decrease in import
- Demonstration effect and modernization
- Rise of internal debt and foreign borrowing
- decrease in prices of raw materials, fuels and energies
- decrease in wage rate, interest rate and rate of rent
- decrease in profit margin desired by firm
- introduction of technology and increase in resources available
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