5. Disinflation and Deflation (Ch10-11)

Principles of Macroeconomics (with Xtra!)

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T he terms disinflation and deflation are sometimes confused with each other. Disinflation is a decline in the rate of increase in average prices. For instance, between 1981 and 1983, the annual rate of increase in the consumer price index (CPI) in Canada declined from about 12 per cent to about 4 per cent. Again, from 1990 to 1992, the annual change in the CPI dropped from 5 per cent to 2 per cent. Deflation refers to a sustained fall in prices, where the annual change in the CPI is negative year after year. The best known example of deflation in Canada was during the 1930s when prices fell more than 20 per cent over a four-year period. The debt-deflation spiral The Great Depression of the 1930s is an example of how deflation can snowball, where a contraction in spending induces a fall in prices and the decline in economic activity then feeds on itself. People and businesses earned less income to pay their debts and this forced prices still lower in a process that economists call a debt-deflation
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This document was uploaded on 02/07/2008.

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