Evaluate the view that inflation is always preferable to deflation
Inflation is the general rise in price of goods and services in an economy over a period of time
Deflation is the general fall in prices of goods and services of goods and services in an economy over a period of time
Inflation will lead to a rise in unemployment as people will have less disposable income and will spend less thus a fall in AD,
leading to firms making less sales, which leads to firms removing workers
GDP and economics growth falls as there’s less productivity, meaning the living standards for citizens will fall. As people have
less disposable income, a firm’s profit decreases, leading to less investment
Also, there will be lower tax revenue for the government, so government spending is reduced unless they willingly run a
greater deficit. This will harm the competitiveness as firms aren’t able to provide funding for innovation or inventions
However, an increase in inflation will mean our exports become cheaper leading to greater exports and so our current
account deficit can fall. This will lead to the value of the currency falling leading to greater injections as foreign firms will be
able to manufacture cheaper. As a result, there will be greater employment and economic growth in the long run
Overall, in the short run, the economy may shrink in size as inflation leads to unemployment, lower AD and AS due to
increase in cost of production, lower disposable incomes and low profits
In the long run, exports will become cheaper for foreign firms and imports become more expensive. As a result, AD for
domestic goods will increase leading to greater investment leading to greater employment and economic growth leading to
a fall in current account deficit
Deflation will lead to a rise in employment as prices will be low leading to people spending more. Increasing AD and firms
will seek to increase supply to match AD. This will mean employment will increase, leading to people having greater
disposable income due to this spending will increase and economic growth will be achieved and living standards will increase
However, deflation may also lead to an economy failing as people expect prices to fall so they will wait for prices to fall,
leading to a fall in AD as people are saving their money to buy the good at its lowered price
This will lead to firms cutting their cost of production by removing labour, increasing
unemployment. As people expect prices they spend less leading to AD falling which leads to
prices falling as seen on the diagram, this leads to people not spending once again and leads
to GDP falling from YE to Y2
Overall, in the short run, deflation will lead to people spending more and greater employment
as prices have fallen. This will lead to economic growth as more is spent and profits of firms increase. As a result, firms can
invest and increase their workforce or invest in capital lowering their Cost of production and leading to greater GDP
However, in the long run, continued deflation will mean people will save instead of spending as they know prices will fall. As
a result, AD falls leading to increased unemployment and the economy shrinking. It could lead to the failure of the economy
In conclusion, inflation encourages people and firms to spend whereas deflation discourages people/firms to spend as they
wait for prices to plummet in before spending their money. As a result, the economy will grow bigger with inflation than
deflation. It will lead to employment and, economic growth and higher standards of living, whereas, deflation will lead to the
economy shrinking, unemployment and living standards falling as people have less and less disposable incomes
However, it is a possibility that neither is favourable but instead we should be aiming for price stability, yet this is an
unrealistic target and a difficult one to achieve as a result Governments choose inflation as it leads to greater tax revenues
and higher standards of living instead of a civil unrest deflation may cause as seen in Venezuela
Inflation is the general rise in price of goods and services in an economy over a period of time
Deflation is the general fall in prices of goods and services of goods and services in an economy over a period of time
Inflation will lead to a rise in unemployment as people will have less disposable income and will spend less thus a fall in AD,
leading to firms making less sales, which leads to firms removing workers
GDP and economics growth falls as there’s less productivity, meaning the living standards for citizens will fall. As people have
less disposable income, a firm’s profit decreases, leading to less investment
Also, there will be lower tax revenue for the government, so government spending is reduced unless they willingly run a
greater deficit. This will harm the competitiveness as firms aren’t able to provide funding for innovation or inventions
However, an increase in inflation will mean our exports become cheaper leading to greater exports and so our current
account deficit can fall. This will lead to the value of the currency falling leading to greater injections as foreign firms will be
able to manufacture cheaper. As a result, there will be greater employment and economic growth in the long run
Overall, in the short run, the economy may shrink in size as inflation leads to unemployment, lower AD and AS due to
increase in cost of production, lower disposable incomes and low profits
In the long run, exports will become cheaper for foreign firms and imports become more expensive. As a result, AD for
domestic goods will increase leading to greater investment leading to greater employment and economic growth leading to
a fall in current account deficit
Deflation will lead to a rise in employment as prices will be low leading to people spending more. Increasing AD and firms
will seek to increase supply to match AD. This will mean employment will increase, leading to people having greater
disposable income due to this spending will increase and economic growth will be achieved and living standards will increase
However, deflation may also lead to an economy failing as people expect prices to fall so they will wait for prices to fall,
leading to a fall in AD as people are saving their money to buy the good at its lowered price
This will lead to firms cutting their cost of production by removing labour, increasing
unemployment. As people expect prices they spend less leading to AD falling which leads to
prices falling as seen on the diagram, this leads to people not spending once again and leads
to GDP falling from YE to Y2
Overall, in the short run, deflation will lead to people spending more and greater employment
as prices have fallen. This will lead to economic growth as more is spent and profits of firms increase. As a result, firms can
invest and increase their workforce or invest in capital lowering their Cost of production and leading to greater GDP
However, in the long run, continued deflation will mean people will save instead of spending as they know prices will fall. As
a result, AD falls leading to increased unemployment and the economy shrinking. It could lead to the failure of the economy
In conclusion, inflation encourages people and firms to spend whereas deflation discourages people/firms to spend as they
wait for prices to plummet in before spending their money. As a result, the economy will grow bigger with inflation than
deflation. It will lead to employment and, economic growth and higher standards of living, whereas, deflation will lead to the
economy shrinking, unemployment and living standards falling as people have less and less disposable incomes
However, it is a possibility that neither is favourable but instead we should be aiming for price stability, yet this is an
unrealistic target and a difficult one to achieve as a result Governments choose inflation as it leads to greater tax revenues
and higher standards of living instead of a civil unrest deflation may cause as seen in Venezuela
