Specific examples of the negative effects of deflation include:
- The Great Depression, which began in 1929, was a period of severe deflation. The prices of goods and services fell by more than 25% between 1929 and 1933. This led to a decrease in aggregate demand, which caused businesses to cut production and lay off workers. The unemployment rate rose to over 25%, and the economy did not recover until the early 1940s.
- In the early 1990s, Japan experienced a period of deflation. The prices of goods and services fell by an average of 1% per year between 1992 and 1999. This led to a decrease in aggregate demand, which caused businesses to cut production and lay off workers. The unemployment rate rose to over 5%, and the economy stagnated for several years.
The reason these economic theories are widely believe is because of the close alignment with empirical observations.
- The Great Depression, which began in 1929, was a period of severe deflation. The prices of goods and services fell by more than 25% between 1929 and 1933. This led to a decrease in aggregate demand, which caused businesses to cut production and lay off workers. The unemployment rate rose to over 25%, and the economy did not recover until the early 1940s.
- In the early 1990s, Japan experienced a period of deflation. The prices of goods and services fell by an average of 1% per year between 1992 and 1999. This led to a decrease in aggregate demand, which caused businesses to cut production and lay off workers. The unemployment rate rose to over 5%, and the economy stagnated for several years.
The reason these economic theories are widely believe is because of the close alignment with empirical observations.