What is deflation?

Deflation generally refers to the falling of prices of goods and services in an economy.

According to Crowther:

Deflation is that state in which the value of money rises and the price of goods and services falls.

Reasons for deflation:

1. Withdrawal of money by the Government.

2. Imposition of heavy direct taxes.

3. When Government takes heavy loans from the public (voluntary or compulsory or both).

4. When various measures are adopted by the Central Bank for credit control, such as increase in CRR, credit rationing and direct action.

5. When the Central Bank increases the Bank Rate, which curtails the quantity of credit in the economy.

6. When there is a state of over-production (excess supply over demand).

Steps generally taken to check deflation:

1. Economic subsidies to the industrial sector by the Government.

2. Increasing the public expenditure.

3. Increasing the employment opportunities in the economy.

4. To increase the money supply in circulation by repayment of old public debts.

5. Curtailment in taxes in order to increase the purchasing power of the people.

6. Increasing the money supply.

7. Promoting credit creation by the banks in general.