Though most people don't like to hear the term deflation because they understand that it affects them negatively, it is an issue that cannot be pushed aside easily nor can people persist in ignoring it. This fact is understood more so by the banking system because it greatly affects the way the run things. Deflation is simply the opposite of inflation and it refers to a time when prices are on a decline. When this occurs, it means that though money still has it's value, prices of commodities in the market are on a decline. In most cases, this is caused by four major factors. These include; there is no enough money in the market, the goods are in high demand, the market needs more money and the demand for goods is shooting up.
When this occurs, most people think that the best solution is to have more money injected into the economy, however this should not necessarily be the case. Professional economists argue that deflation is caused by various factors which could be affecting the economy at that particular moment and the state does not have to be negative because deflation can work on two weighing scales, one, there is the good deflation and the bad deflation and it is up to them to analyze which one the economy is going through before making any change. On the one hand, bad deflation is caused by a decline in supply of money while good deflation is caused by an increase in the supply of goods.
As such by pointing these factors out, it becomes easier for the banking system to identify what measure need to be put into place in order to reverse the situation. By creating a balance, it might be possible to revert deflation and get rid of this issue that has been dogging the economy since 2001 and which currently, is proving to be a real problem.
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