Why is delfation bad And why is moderate inflation good Why

Why is delfation bad?

And why is moderate inflation good?

Why are both inflation and deflation equally damaging?

Solution

The deflation is bad because it reduces the price level in the economy, when the prices are falling the people postpone their consumption on the belief that the prices fall still further. Since the consumption is a component of the aggregate demand this action would reduces the aggregate demand. When there is low aggregate demand the business people will not make investment due to the fear of loss. So it would negatively affect the economy. So there would be large unemployment so this may lead to a depression

A mild level of inflation is very good for the economy and it incentivizes the production activities. The low level of inflation stresses the importance of the price stability in the economy. When there is mild level of inflation people will consume now and does not postpone their consumption so this will raise the aggregate demand in the economy. So now the companies hire new employees and increase their production.

The infaltion is bad because it can lower your standard of living, when the prices are rising we cannot consume many commodities due to the higher price so limit the consumption here can reduce the standard of living of the people.