Question

I need step by step solution to the following this question asap .I have limited time so please do it quickly with detailed explanation

thanks in advance/Ha

questions1. In recent years, many inflation targeting central banks have been struggling with inflation being too low, and some even with deflation. Explain why deflation may be a problem?

Answer 1

Answer:

Inflation to some level is good for the economy as it encourages enterprises to continue and expand production and consequently the real GDP of the economy. However higher inflation than accepted level is equally bad for the economy as the purchasing power of currency decreases significantly. In that case, central banks target inflation to check under acceptable limit. This results sometimes into deflation which means the general decrease in average price level.

Deflation is a more severe problem than inflation in the sense that the price decrease discourages producers to produce due to lower demand of goods. There is firing of workers from job and unemployment increases. The income of unemployed decreases causing reduction in demand of goods and services. This again decreases price. Producers are again discouraged from production. Unemployment again increases and this becomes a vicious circle. This causes chaos in the economy.