The Differences Between Inflation, Deflation and Stagflation Revealed

Over the course of many years economic cycles go through periods of inflation, deflation and stagflation. Each one of these has a specific effect on the overall economy as a whole and sometimes can lead to long periods of recessions or depressions in the economy.

Deflation

When in times of deflation we typically see the falling of prices. This is generally caused by credit or money supplies being contracted. A reduction in government or consumer spending could also be a cause of deflation which often leads to an increase in unemployment.

Inflation

Inflation could be monetary or price inflation. During periods of inflation their is an increase of the money supply. When you have inflation more money being circulated which causes the currency to lose its purchasing power which leads to an increase in the price of goods and services.

Stagflation

When you have a slow economy with high inflation rates and unemployment, stagflation is usually the result. When the economy does not grow and prices continue to rise you have a stagflation cycle in the economy.

Also is a fourth scenario called hyperinflation in where you have high levels of inflation the get out of control and eventually renders the currency worthless. It happens when their is a huge increase in the money supply and no growth or increase in the output of services and goods.

A most recent example of hyperinflation in where a currency was reduced to virtually nothing is Zimbabwe where $100 billion dollars buys as little as three eggs!



Source by Daniel Cassidy


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