Deflation can be as great a problem for
economies as inflation. An article in the
New
York Times
reported in July 2012 that the
International Monetary Fund warned of “‘a
sizeable risk’ of deflation in the euro zone.”
a. Why might falling prices cause problems for
an economy?
b. Most central banks in high-income countries
have been credibly committed to low inflation
rates for some time, and the European Central
Bank has an inflation target of just under 2%.
Why might this commitment make the task of
preventing deflation more difficult?