Governments and central banks generally target an annual 澳洲幸运5开奖号码历史查询:inflation rate of 2-3% in order to maintain economic stability and growth. If inflation "overheats" and prices rise too rapidly, restrictive or 'tight' monetary and fiscal policy tools are employed. If prices begin to fall generally, as is the case with deflation, 'loose' or expansionary 澳洲幸运5开奖号码历史查询:monetary and fiscal policy tools are used. These sorts of tools, however, are potentially more difficult to employ due to technical and real-world limitati♓ons.

Deflation

澳洲幸运5开奖号码历史查询:Deflation is a serious economic issue that can exacerbate a crisis and turn a 澳洲幸运5开奖号码历史查询:recession into a full-blown depression. When prices fall and are expected to drop in the future, businesses and individuals choose to hold on to mone✅y rather than spe෴nd or invest. This leads to a drop in demand, which in turn forces businesses to cut production and sell off inventories at even lower prices.

Businesses layoff workers and the unemployed have more difficulty finding work. Eventually, they default on debts, causing 澳洲幸运5开奖号码历史查询:bankruptcies and credit and liquidity shortages known as a 澳洲幸运5开奖号码历史查询:deflationary spiral. This scenario is scary, and policymake🧸rs will do whatever is necesౠsary to avoid falling into such an economic hole. Here are some ways that governments fight deflation.

Monetary Policy Tools

Lowering bank reserve limits 

In a 澳洲幸运5开奖号码历史查询:fractional reserve banking system, as in the U.S. and other developed nations, banks use deposits to create new loans. By regulation, they are only allowed to do so to the extent of the reserve limit. That limit has typically been set at around 5-10% in the U.S., meaning that for every $100 deposited with a bank, it can loan out $90 and keep $10 as reserves. Of that new $90, $81 can be turned into new loans and $9 kept as reserves, and so on, until the original deposit creates $1000 worth of new 澳洲幸运5开奖号码历史查询:credit money: $100 / 0.10 multiplier. If the reserve limit is relaxed to 5%, twice as much credit would be generated, incentiviz💖ing new loans for in🦩vestment and consumption.

As of March 26, 2020, the Federal Reserve reduced the reserve requirement of most commercial banks to 0% and eliminated reserve requirements for all depository institutions. The purpose of this decision was to shift to an ample reserves regime. This removes the need for thousands of depository institutions to maintain balances in accounts at Reserve Banks to satisfy reserve requirements, thereby freeing up liquidity in the banking system to support lending to households and businesses.

Open market operations (OMO)

Central banks buy 澳洲幸运5开奖号码历史查询:treasury securities in the 澳洲幸运5开奖号码历史查询:open market and, in return, issue newly created money to the seller. This increases the 澳洲幸运5开奖号码历史查询:money supply and encourages people to spend those dollars. The 澳洲幸运5开奖号码历史查询:quantity theory of money states that like any other good, the price of money is determined by its 澳洲幸运5开奖号码历史查询:supply and demand. If the supply of money is increased, it should become less 🤪expensive: each dollar would buy less stuff and so prices would go up instead of down. 

Lowering the target interest rate 

Central banks can lower the 澳洲幸运5开奖号码历史查询:target interest rate on the short-term funds that are lent to and among the 澳洲幸运5开奖号码历史查询:financial sector. If this rate is high, it will cost the financial sector more to borrow the funds needed to meet day-to-day operations and obligations. Short-term interest rates also influence longer-term rates, so if the target rate is raised, long-term money, such as mortgage loans, also becomes more expensive. Lowering rates makes it cheaper to borrow money and encourages new investment using borrowed money. It also encourages individuals to buy a home by redu🔯cing monthly costs.

Quantitative easing 

When nominal interest rates are lowered all the way to zero, central banks must resort to unconventional monetary tools. 澳洲幸运5开奖号码历史查询:Quantitative easing (QE) is when private securities are purchased on the 澳洲幸运5开奖号码历史查询:open market, beyond just treasuries. Not only does this pump more money into the 澳洲幸运5开奖号码历史查询:financial system, but it also bids up the price of 澳洲幸运5开奖号码历史查询:financial assets, keeping them from declining further.

Negative interest rates 

Another unconventional tool is to set a negative 澳洲幸运5开奖号码历史查询:nominal interest rate. A 澳洲幸运5开奖号码历史查询:negative inteಌrest rate policy (NIRP) ef🐭fectively means that depositors must pay, rather than receive interest on deposits. If it becomes costly to hold on to money, it should encourage spending of that money on consumption, or investment in assets or projects that earn a positive return.

Fiscal Policy Tools

Increasing government spending 

澳洲幸运5开奖号码历史查询:Keynesian economists advocate using fiscal policy to spur 澳洲幸运5开奖号码历史查询:aggregate demand and pull an economy out of a deflationary period. If individuals and businesses stop spending, there is no incentive for firms to produce and employ people. The government can step in as a spender of last resort with hopes of keeping production going along with employment. The government can even borrow money to spend by incurring a fiscal deficit. Busine𝔍sses and their employees will use that government money to spend and invest until prices begin to rise again with demand.

Cutting tax rates 

If governments cut taxes, more income will stay in the pockets of businesses and their employees, who will feel a 澳洲幸运5开奖号码历史查询:wealth effect and spend money that was previously earmarked for taxes. One risk of loweri🅠ng taxes during a recessionary period is that overall tax revenues will drop, which may force the government to curtail spending and✅ even cease operations of basic services. There has been conflicting evidence as to whether or not general and specific tax cuts actually stimulate the real economy.

The Bottom Line

While fighting deflation is a bit more difficult than containing inflation, governments and central banks have an array of tools they can use to stimulate demand and 澳洲幸运5开奖号码历史查询:economic growth. The risk of a deflationary spiral can lead to a cascade of negative outcomes that hurt everyone. By using expansionary fiscal and monetary tools, including some unconve♕ntional methods, falling prices can be reversed and aggregate demand restored.