Why is deflation bad since it is related to the currency appreciation, and people’s purchasing power have become stronger?
- RayLv 62 months agoFavorite Answer
Deflation of a currency causes a drop in consumer spending. This did happen a little over a century ago in USA. If a currency gains value [deflation] people will save. Why spend your $1000 now if you can save it and next month it buys twice as many goods! And wait another month, ohh boy!
So people save and don't spend, issue is businesses will loose income, this leads to mass unemployment. Governments also loose sources of income since no income tax is filed.
- OiyLv 52 months ago
True, but the consumers have no confidence in the economy. They don't use stronger purchasing power. There will be demand. And the deflation would become deeper without new investment.
- darkvelvetrainLv 62 months ago
Price deflation is an indication that the demand for goods is lower. This forces producers to cut back on their supplies. This results in a contraction of businesses, which leads to unemployment. This leads to consumers having less money to spend on average, which leads to further contraction of businesses, causing an economic downward spiral.
- nineteenthlyLv 72 months ago
Because people hold back on spending money in the hope that things will get cheaper, which harms the circulation of currency in the economy. Things don't get bought and that leads to financial problems for businesses.