C What is deflation Who are the winners and losers when it o

C) What is deflation? Who are the winners and losers when it occurs?

Solution

Deflation is defined as the fall in general level of prices over a period of time. In other words it can be considered as negative inflation.

When defaltion occurs, the purchasing power of money increases, that is, with the same amount of money you can now buy a greater amount of goods. The winners from deflation are savers and lenders who gain in real terms due to defaltion. This happens because the amount of money they receive after deflation now has more value in real terms. Similarly the losers from defaltion are banks and borrowers since they now pay out more in real terms.