Deflation

Definition

Deflation refers to a decrease in the general price level of goods and services in an economy over a period of time. This phenomenon often occurs during economic downturns and can lead to reduced consumer spending, increased unemployment, and a slowdown in economic activity. During the Great Depression, deflation significantly impacted New Zealand society, as falling prices meant that many individuals and businesses faced severe financial challenges, making it difficult for them to repay debts and maintain their livelihoods.

5 Must Know Facts For Your Next Test

1. During the Great Depression, New Zealand experienced significant deflation, with prices falling drastically, which worsened the economic situation for many households and businesses.
2. Deflation led to an increase in the real burden of debt, as individuals and businesses found it harder to pay off loans with declining incomes and asset values.
3. The government struggled to combat deflation through various measures, including monetary policy adjustments and public works programs to stimulate the economy.
4. Deflation is often associated with decreased consumer confidence, as people may delay purchases in anticipation of lower prices in the future.
5. The effects of deflation were particularly harsh on farmers and exporters in New Zealand, who faced plummeting prices for their products while costs remained relatively fixed.

Review Questions

• How did deflation during the Great Depression affect consumer behavior in New Zealand?
  • Deflation during the Great Depression led to a significant change in consumer behavior as people began to expect prices to continue falling. This anticipation caused many individuals to delay purchases, further reducing demand for goods and services. As businesses struggled with decreasing sales, they were forced to cut costs, leading to layoffs and increased unemployment, creating a vicious cycle that deepened the economic downturn.
• Analyze how deflation influenced government policies in New Zealand during the Great Depression.
  • Deflation prompted the New Zealand government to implement various policies aimed at stimulating the economy. One significant response was increased public works spending to create jobs and inject money into the economy. Additionally, monetary policy was adjusted, with efforts made to lower interest rates and expand credit access. These measures were intended to counteract deflationary pressures by boosting consumer confidence and encouraging spending.
• Evaluate the long-term consequences of deflation on New Zealand's economy after the Great Depression.
  • The long-term consequences of deflation on New Zealand's economy following the Great Depression included lasting changes in economic policy and public attitudes toward government intervention. The experience of deflation revealed vulnerabilities within the economic system and prompted a shift towards more active government involvement in managing the economy. This included the establishment of social welfare programs and a greater emphasis on stabilizing prices, which shaped future economic strategies and contributed to New Zealand's post-war recovery.

Related terms

Inflation: A sustained increase in the general price level of goods and services, which reduces purchasing power.

Economic Depression: A prolonged period of significant decline in economic activity, characterized by high unemployment and decreased consumer demand.

Monetary Policy: The process by which a central bank manages the supply of money to achieve specific economic goals, such as controlling inflation or stabilizing the currency.