An unadjusted rate, value or change in value. This type of measure often reflects the current situation, such as the current price of a car, and doesn't make adjustments to reflect factors such as seasonality or inflation, which provide a more accurate measure in real terms. One: We put off our spending as we know process are falling egg.
Buying a car as we know prices are falling so a collapse in demand - people will wait to get the best possible price. Two: Weakens the effectiveness of monetary policy Monetary policy has a limit.
It lowers interest rates to stimulate the economy. But we are already very close to zero to encourage people to borrow and spend. If the rate is 0% the real interest rate will be positive if there is deflation, your
...money will buy you more at the end of the year than at the beginning. Your money is growing.
It weakens the effectiveness of monetary policy. In real terms you have interest -? growing as savings Nominal rate minus inflation rate = real interest rate Third: It raises the real value of a debt burden For example: a mortgage the worst years are the first years egg. 30 year mortgage as you borrow a large amount of money, you start to pay that money back straight away. If there is inflation your wages may creep up which means your repayments should look like a smaller amount.
So at the end of he repayment the amounts are smaller in comparison to the early years.
If inflation the amount you pay back looks smaller. 2000 euros every month in 25 year
2000 euros is much less, might just be the price of a meal for four. Income much higher in nominal terms. Deflation - wages may fall. Prices are failing, wages may fall, the amount of money you pay back will become more and more difficult to find every month. The threat of this happening stops people getting mortgage - they're scared.
The burden of real debt rises.
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