Summary causes for Deflation

Classroom

oi-Shoaib MD

By Shoaib Md

Published: Saturday, September 3, 2011, 15:36 [IST]

There can be four possible reasons for deflation. They can even take place under any set of combination also.

-Decreasing Money Supply
-Increasing Supply of Goods
-Decreasing Demand for Goods
-Increasing Demand for Money

Important Increasing demand or decreasing supply of money have the same result i.e. "tight money" either way people want more money than is available.

Both could also result in (or cause) higher interest rates. But the higher interest rates should also tend to balance (or decrease the demand for money because it is now more expensive).

In other words as interest rates rise at some point the demand drops off because people don't want it bad enough to pay such high rates.