Explain why deflation may not always be a problem
Firstly, deflation can be defined as a persistent decrease in the general level of prices. An example would be Japan in the 1990's.There can be "good"deflation which occurs when Long Run Aggregate Supply expands quicker thanAggregate Demand. One potential driver of an expansion of Long Run AggregateSupply could be a productivity boost. This causes a drop in the price level.Deflationcould also be caused by falling commodity prices, e.g. falling oil pricesresulted in negative inflation rates in the UK in 2015. The fall in prices ledto a rise in real wages, which led to an expansion in Aggregate Demand. Thiswas only short term deflation. The oil price shock "dropped out" ofinflation statistics after 12 months.Whenevaluating the effect of deflation, it is important to consider how great thedeflation is e.g. -0.1% or -10%, as well as how long the deflation lasts.
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