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What is reflation?
Unfortunately, the world is not inevitable to experiencing economic uncertainties. We call this recession. But what happens after this? There are many phases after a period of contraction, and the initial one is called reflation. After deflation, the economy will find a way to make a recovery, and one of them includes reflation. It is a monetary policy or a fiscal policy that expands output, triggers spending, and curbs what deflation has caused after recessions.
Reflation is like an aid to block deflation. Deflation is a period when the prices of goods and services generally decrease. It happens when inflation declines lower than 0%. Reflation is not an easy and fast task. It is a long road ahead economic prosperity. The reacceleration process will take time, and there will be a struggle to reduce any extra capacity in the labor market.
How does reflation work?
Reflation has quite a few policies. Let us talk more about them in detail. First, we have tax reduction. If entities like employees and corporations get to pay lesser taxes, they get to have more money that will help when the money is spent in the economy. Hence, it will lift the demand and prices for the goods.
Next, we have interest rate reduction. If this happens, borrowing money can be more accessible. In this case, people are more liberated to spend money instead of stockpiling that capital in a savings account.
We also have the money supply change. Let us say that the central banks decide to boost currency amounts and any other liquid assets in the banking system. The cost of money will decline, and it will produce more investments. Hence, this will make more money for consumers.
Finally, we have capital projects. If massive projects are initiated, there will be job openings, and the unemployment rate will decrease. Hence, many people will have more spending power.
Now that we have more details about the policies, we realize that reflation is more on increasing the demand for goods because this will give money to people who will spend more money.
The difference between reflation and inflation
They might sound similar, but these two are entirely different things. First of all, reflation is a good thing. It is when the economy is trying to recover. It wants to have full employment and growth, and the price increases. On the other hand, inflation is bad since the price increase is due to the total capacity. During inflation, the price increase is rapid while it is slow for reflation. Reflation is somehow like controlled inflation.
Did you know?
Even before, American governments were already using reflation policies to save failed business expansions. Many governments try to prevent the economy from collapsing after a massive problem, but none successfully avoids the business cycle’s contraction phase. The government will always be agitated when it wants to solve a problem. It means well, but the agitation does more harm than good. It only delays the recovery even more.
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