Deflation:

Definition: A sustained decrease in the average prices of good/services in an

economy over a period of time.

Causes:
1. Fall in Aggregate Demand (AD curve shifts inwards)
2. Increase in Long-Run Aggregate Supply (AS curve shifts out)

Consequences:

Wait and See approach adopted by consumers Consumers will wait to see
if prices will drop
further to get
cheaper prices
Borrowers suffer Real value of loans increase.
If caused by fall in AD, firms profit margins will decrease -> Redundancies are
made to cut costs.
Consumers lose confidence and save more money, leading to a further
decline.