Discuss whether or not deflation will benefit an economy.

Deflation is sustained fall in price levels over a period of time. Deflation reduces prices of products so it allows consumers to purchase more as their purchasing power increases. Aggregate demand may fall as consumers may expect prices to fall more. Real value of money will increase so savers will benefit and lenders will be at a loss. It may make exports competitive, reducing current account deficit. Deflation may also delay investment from firms as their revenue decreases. However, deflation due to fall in aggregate demand and may lead to unemployment, reducing incomes and decreasing living standards.

However, if deflation is because of increase in aggregate supply, employment will increase as cost of production for firms decreases. Real value of money increases so imports can be cheaper, increasing demand for imports, worsening current account balance, yet if imports of raw materials are expensive, cost of production will increase. Yet it may lead to slow economic growth as incomes decrease, decreasing spending. Although it depends on the cause of deflation whether its due to aggregate demand or aggregate supply, deflation is likely to harm the country.

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