DEFLATIONARY SPIRAL Meaning and
Definition
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A deflationary spiral refers to a self-perpetuating cycle of decreasing prices, reduced consumer spending, and economic contraction. It occurs when falling prices lead to a decrease in demand, causing producers to lower prices further, hence creating a cycle where decreased demand and falling prices reinforce each other in a downward spiral.
In a deflationary spiral, a primary catalyst is a decline in aggregate demand, which could result from various factors such as a decrease in consumer confidence, widespread unemployment, or a financial crisis. As prices fall, consumers may postpone purchases, expecting further price reductions in the future. This decrease in consumer spending puts pressure on businesses to lower prices in order to entice customers. However, these price reductions lead to reduced revenue and profitability for businesses. Consequently, they tend to reduce production, decrease wages, and lay off workers, resulting in increased unemployment and reduced disposable income. This further exacerbates the decline in consumer spending.
As the spiral continues, the economy experiences reduced investment, as businesses are reluctant to invest in new projects due to uncertain demand and falling prices. This lack of investment exacerbates the economic downturn, leading to further unemployment and decreased economic output.
Breaking out of a deflationary spiral can be challenging. Government intervention through stimulus measures such as increased government spending and monetary policy adjustments, such as lowering interest rates, are commonly employed to stimulate demand and halt the downward spiral.
Common Misspellings for DEFLATIONARY SPIRAL
- seflationary spiral
- xeflationary spiral
- ceflationary spiral
- feflationary spiral
- reflationary spiral
- eeflationary spiral
- dwflationary spiral
- dsflationary spiral
- ddflationary spiral
- drflationary spiral
- d4flationary spiral
- d3flationary spiral
- dedlationary spiral
- declationary spiral
- devlationary spiral
- deglationary spiral
- detlationary spiral
- derlationary spiral
- defkationary spiral
- defpationary spiral
Etymology of DEFLATIONARY SPIRAL
The word "deflationary spiral" is a term used in economics to describe a self-reinforcing cycle of declining prices, wages, and economic activity. The etymology of this term can be understood by breaking it down into its two main components.
1. Deflationary: The term "deflation" refers to a decrease in the general price level of goods and services within an economy. It is derived from the Latin word "deflare", which means "to blow away" or "to reduce". In economic terms, deflation is the opposite of inflation, where the value of currency increases, leading to a rise in prices.
2. Spiral: The term "spiral" refers to a progressive or evolving process that continuously deepens or intensifies. It comes from the Latin word "spirare", meaning "to breathe".
