Deflation can have devastating effects on both firms and consumers. first of all, as i mentioned before, there will be more unemployment because firms tend to have lower wages than before. this means that household has more possibility to lose jobs. Secondly, firms will not earn as much as they used to because of deflation. as they earn less, they may lose their confidence in business and this will cause firms not to invest.

Even though there is a deflation take place, economy will self-correct because in economy, when something changes, there are other responsiveness. in this case, deflation will differ the AS and AD curve. however there are other factors that can change the AS and AD. Thus these AS and AD curves will come back to be stable again.

This is because there is a lot of time consuming for economy to be stable again without government intervention. with government intervention, the economy can come back to the stable point rapidly.

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If prices are falling, consumers will put off the purchase of any durable goods as they will want to wait until the price drop even further. This may be reffered to as deferred consumption.

This article suggests that an economy experiencing deflation may eventually “self-correct” as a result of cuts in spending by firms, this will in turn increase AD.

This referes to the disavantage of demand side policy. In theory, the time taks for an economic to set back and self-correct is huge, and no one knows how bad the economy would get before it self-correct

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One of the main threats of having deflation in an economy is that businesses and firms of all kinds will earn less money. By having this problem, other issues may arise as well such as having an increase an unemployment. Since the firms earn less money, this problem may make them become pessimistic about the economy, which then causes them to lower the costs of production. Unfortunately, one of the main methods of lowering the costs of production would be to lay off workers and this would mean that they have to pay less wages, but the level of unemployment in the economy will increase. Other issues of deflation include having a lowering economy and lower economic activity.

2) The expectation of future deflation can have as equally devastating effect. Why is this?

If both firms and consumers are expecting future deflation, then there are two things that may happen. Firms will expect to lay off workers to lower the costs of production, and the consumers will want to save as more money because of the risk of being unemployed and to spend their money in the future when the prices of goods are lowered. This would cause having an increase in the level of withdrawal and less injections to the economy.

3) What evidence does the article put forth that an economy experiencing deflation may eventually “self-correct”, meaning return to the full employment level of output in the long-run?

Although deflation is a situation that governments may have to intervene with, this article brings about evidence that deflation may also eventually self correct itself. This is because if the level of interest rates are lower, consumers theoretically will spend more than save, which would then push the Aggregate Demand positively and hence causing an decrease in the level of unemployment.

4) Why don’t governments and central banks just sit back and let the economy self-correct? In other words, why are fiscal and monetary policies being used so aggressively by the US, Great Britain and Switzerland during this economic crisis?

During an economic crisis, the economic growth of a country will be much slower than normal. This means that the aggregate demand is low and that the level of unemployment is high. Most countries would not choose to let the economy self correct because even though when the prices may lower and the consumer spending may increase, it is still necessary for the economy to have some government spending. This is because the only way to shift the Long Run Aggregate Supply (LRAS) positively is if the government increases its spending. This is shown in the keynesian graph. Fiscal policies deal with having the government spending to increase in its public goods/ merit goods such as healthcare, education, etc. The monetary policy refers to the interest rates, which is controlled mainly by the central bank. By controlling the interest rates, the central banks may be able to push consumers' incentives to spending more or spending less. This is to control the level of inflation.

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2. If people expect a future deflation, they may keep their money unit the deflation happen, in order to buy goods in a lower price. During this period, the demand would be low, making prices lower, as well as the quantity supplied, which affects the level of output. Eventually, a deflation really happen.

3. The article suggests that the deflation may "self-correct" if the interest rate keep low. As the interest rate is low, people with spare money would tend to spend more rather than saving them in banks for little interest, and the costs of borrowing money is low, which encourages households and firms to borrow money for fixed assets or investment, and make the aggregate demand increase. So eventually, the economy would slowly stand up in the long run.

4. Because a "self-correct" of economy happens in a long duration of time, in this long period of time, the country's economy would fall behind as others' are growing. Which means the country is "sleeping", and the distance between it and other foreign countries is enlarging. This is not appreciated for any country. So, if a country doesn't want to lag behind in economy, it should make effort to get itself away from recession, as fast as possible.

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2.A deferred consumption caused by the consumers expectation. If price is falling, then the consumer will want to wait to spent their money until the price drop even further.

3.The article suggest consumer knows the uncertainty of the future and which aggregate demand will increase again.

4.Because it takes a very long period for the economic to set back and self-correct. Therefore, government wants to intervene so that the aggregate demand can fall rapidly. In Keynesian perspective, government use demand-side policy and so shift the aggregate demand so that increase the consumption and employment rate.

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2. If consumers expect future deflation, they will want to wait until prices fall further before spending their money. This is called deferred consumption.

3. The article suggests that consumers' mindsets may cause they to believe that inflation is bound to occur in the future, which may actually lead to an increase in AD when price levels fall. This quickly brings AD back up.

4. The governments don't want aggregate demand to fall so slow that the economy becomes heavily disabled like during The Great Depression where consumer's purchasing power was minimal and unemployment was so high. Without government intervention, it might take too long for the economy to 'self-correct'. In the keynesian perspective, an economy in a deep recession will not be able to be saved by market forces alone – the government has to increase spending to kickstart an increase in AD again

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As much as I appreciate your point in question 3, I must stress that even if the deflation is not anticipated, it will probably still occur. The fact that people expected the inflation to continue rising in the USA, they still got into a recession and it surprised the people which actually worsened its effect.

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2. This is because consumers will not spend in order to spend later when prices are lower. By anticipating the deflation, the consumers are only speeding its arrival and aggravating the problem.

3. This article does not really present valid evidence that the deflation will eventually self-correct and it actually seems to predict that doom will occur if this problem continues

4. These policies are being used because these governments remember that it was only due to government intervention that they pulled themselves out of the Great Depression. Based on that experience, the best course of action is reflationary policy.

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With falling prices borrowers will experience an increase in the real value of their debt and in such a climate, companies and individuals with debt may struggle. This in itself may exert a further twist to the downward deflationary spiral. Also, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression.

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2) The expectation of future deflation can have an equally devastating effect. Why is this?

Deflation may cause people to postpone their spending in the expectation of even lower prices in the future. When this happens, aggregate demand falls, businesses are unable to sell their goods, make profits or meet their debt repayment obligations, and they may be forced to cut output and employment of workers.

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3) What evidence does the article put forth that an economy experiencing deflation may eventually “self-correct”, meaning return to the full employment level of output in the long-run?

Deflation persisting in the economy depends on the mindset of the public. “So far, expectations of inflation remain stable: that sentiment is itself a welcome bulwark against deflation.”

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4) Why don’t governments and central banks just sit back and let the economy self-correct? In other words, why are fiscal and monetary policies being used so aggressively by the US, Great Britain and Switzerland during this economic crisis?

Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals. “…inflation is easier to put right than deflation. A central bank can raise interest rates as high as it wants to suppress inflation, but it cannot cut nominal rates below zero… In the worst case, rising debts and defaults depress growth, poisoning the economy by deepening deflation and pressing real interest rates higher… Given the choice, erring on the side of inflation would be less catastrophic than erring on the side of deflation.”

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I liked your answer for the fourth question i had not thought about the fact that people would have to expect lower wages.

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2. An expectation of deflation can have a equally devastating effect because it causes firms to try and prepare for this deflation so they will lay of workers in anticipation. this means even if there is no deflation there are the effects as if there was.

3. This article suggests that an economy may correct itself because of cuts in spending by firms. this means that the prices of goods would decrease and then in turn aggregate demand would increase.

4. Governments don't want to sit back and wait for an economy to correct itself because of how long it would take. This self-correction is a long term effect and who knows how bad the economy would get before being self-corrected.

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With your answer to number 4, I think its important to further examine the situation before concluding that the economy cannot self-correct. Even if consumer prices are falling due to a decrease in aggregate demand and consumer spending, there is still a chance that the economy can self-correct.

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2) If deflation is expected in the near future then consumers who would normally consume would rather save their money for the rainy day approaching, by doing this they are effectively doing the same as they will have in Question 1, which leads to the same downward spiral.

3) The article states that people will “cut spending” which will mean they will save more. Firms have access to this saving and therefore will this money to increase their stock of capital and their output, which will increase the national income again.

4) Governments don’t wait for the economy to self-correct because this would take a long time, this can only happen in the long run. The huge fiscal stimulus are implemented because people are not willing to accept lower wages at the time. The short run is also called the sticky wages period, meaning that firms cannot decrease wages in such a short time limit. For the economy to self-correct people would have to accept lower income and therefore less spending.

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