deflationary spiral

(noun)

A situation where decreases in price lead to lower production, which in turn leads to lower wages and demand, which leads to further decreases in price.

Related Terms

Examples of deflationary spiral in the following topics:

  • Deflation

    • This cycle of continuing inflation is called a deflationary spiral.

  • The Functions of Money

    • It can replace money as the method of exchange in times of monetary crisis, such as when a the currency is either unstable (e.g. hyperinflation or deflationary spiral) or simply unavailable for conducting commerce.

  • Limitations of Monetary Policy

    • Deflation is a problem in a modern economy because it increases the real value of debt and may aggravate recessions and lead to a deflationary spiral.

  • Keynesian Theory

    • Specifically, cutting wages reduces spending and may result in a downwards spiral.
    • This can be another spiraling issue, as money not being exchanged is actively reducing prospective employment, revenues, and future investments.
    • Consider the unemployment and excessive savings problems, and how they stand to lead to spiraling decline.
    • The other side of that coin is that positive economic situations can spiral upwards.

  • Causes and Immediate Impacts of the Crisis

    • Banks, consumers, and the government all contributed to improper borrowing and lending, which in turn created a downward spiraling economy.

  • The Slope of the Aggregate Demand Curve

    • In many ways, what Pigou is putting forward is the idea that downwards spiral on the IS-LM model , as predicted by Keynes due to deflation, will be counterbalanced by an increase in real wages and thus an increase in expenditure.
    • The analysis of interest rates displayed above, through the wealth effect in particular, offsets the negative spiral that could occur as a result of deflation and decreased employment.

  • Asymmetric Information: Adverse Selection and Moral Hazard

    • Asymmetric information starts the downward economic spiral for a firm.

  • Years of Change: The 1960s and 1970s

    • This increased demand pushed up prices, leading to demands for higher wages, which pushed prices higher still in a continuing upward spiral.

  • Arguments For and Against Inflation Targeting Policy Interventions

    • High levels of inflation eat away at savings, increase menu costs and shoe-leather costs, discourage lending, and may create an inflationary spiral that leads to hyperinflation.

  • Fiscal Policy and Economic Stabilization

    • As more companies went bankrupt, he argued, more people would lose their jobs, making income fall further and leading yet more companies to fail in a frightening downward spiral.