issues in economics

The prospect of deflation - a falling overall price level - received a fair amount of attention during late 2002 and 2003. Prompted by a steady decline in the core rate of inflation to levels not reached since the early 1960s, many people began to wonder about the economic consequences when the inflation rate drops below zero. Although the on-going economic recovery suggests that there is a low probability of deflation in the near future, questions about the impact of falling prices are worth considering. At first glance, falling prices might seem like a good thing. But in a period of deflation, overall prices drop - including the price of labor (wages), houses and other assets, and most goods and services. In the simplest example of deflation, all prices and wages fall at the same rate. The purchasing power of incomes and the relationship between the prices of different goods would not change.