Question

Compare and contrast “deflation trap” and “stagflation”

Please type the answer.

Answer 1

Answer -

DEFLATION TRAP - Deflation trap can be understood with the help of the following points -

1 - A vicious cycle of the ongoing lower prices.

2 - a high level of unemployment.

3 - Lower level of production

4 - decreased demand of products due to lesser money in economy

5 - The lower wages due to the widespread unemployment.

STAGFLATION

1 - The situation is inflationary , unlike deflation trap. The price levels are high.

2 - The rate of unemployment is very high

3 - The level of production falls due to the higher production costs

4 - The demand of economy falls to a great extent

5 - policies to lower the rate of inflation may exagerate the unemployment.

6 - lower rate of economic growth

Hence from the above the basic difference between both the phenomenon is of the high and the low prices. In stagflation the prices are higher and in deflation they are low.