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Ask a question to our educatorsWhy may disinflation occur? What are its implications on an economy?
A decrease in aggregate demand compared to the period before or an increase in aggregate supply compared to the period before. However, note that price levels are still rising albeit at a slower rate, this means that AD could still be rising... It is just rising at a slower rate.
Several main reasons can cause an economy to experience disinflation. If a central bank decides to impose a tighter monetary policy and the government starts to sell off some of its securities, it could reduce the supply of money in the economy, causing a disinflationary effect. Similarly, a contraction in the business cycle or a recession can also cause disinflation. For example, businesses may choose not to increase prices to gain greater market share, leading to disinflation.
A reduction in aggregate demand or an increase in long run aggregate supply. If moderate can mean lower prices (this is good) but may indicate a slowing down in the economy and if it continues may lead to deflation.
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