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1. A reduction in the general leve! of prices. Antonym of inflation. 2. A reduction in the leve! of economic activity in an economy. Deflation will result in lower levels of national income, employment and imports, as well as lower rates of increase for wages and prices. It may be brought about by monetary policies such as increases in rates of interest and contraction of the money supply, and/or by fiscal policies such as increases in taxation (direct and indirect) or reductions in government expenditure. The aims of deflation may be to improve the balance of payments, partly by reducing aggregate demand, and thus imports, and partly by causing disinflation and improving exports. 3. The adjustment of an economic variable measured in money terms by a price index in order to give an estimate of the change in the variable in real terms.
Reference: The Penguin Dictionary of Economics, 3rd edt.