The consequences of deflation for both individuals and the performance of the economy
Deflation means prices across the economy are falling over time. This sounds helpful, but it can trap the economy in a damaging spiral of falling spending, rising unemployment and shrinking output.
Formula
Real value of debt = Nominal debt / Price level
Real World
Japan experienced persistent deflation from the late 1990s into the 2010s; consumers repeatedly delayed spending expecting lower prices tomorrow, trapping the economy in stagnation that the Bank of Japan struggled to escape for two decades.
Exam Focus
Always explain the debt-deflation spiral mechanism — rising real debt burdens cut spending further, reinforcing deflation — this chain earns the top analytical marks.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
How well did you know this?