Deflation is a phenomenon of persistent and continuous falling prices. In its initial and later stages it maybe respectively referred to as recession and depression. An important difference between inflation and deflation is that in the former, the rate of price rise has no upper limit.
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Deflation tends to get self-corrected on account of the fact that, in absolute terms, demand cannot fall below a certain level. Another factor worth noting is that while it may be possible to choke off inflation.
To fight deflation, attempts must be made to raise the volume of aggregate effective demand. It will output, income and employment in the economy, Effective demand can be increased partly by consumption expenditure and partly by increasing investment expenditure.
Deflation is different from disinflation. While deflation refers to a situation of general depression and widespread unemployment caused by insufficiency of effective demand, disinflation is a process of reversing inflation without creating unemployment or reducing output.
Deflation is the opposite of inflation. Just as inflation is a phenomenon of rising prices, deflation is a phenomenon of falling prices. In the words of Crowther, “Deflation is that state of the economy where the value of money is rising or the prices are falling.”