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The term, “Deflation” pertains to the general decline in the level of prices, specifically with goods and services, within an economy. The decline is usually associated with a contraction in the money and credit supply. Within a Deflation, a currency’s purchasing power rises within a period of time.

What happens in a Deflation is that the nominal costs of capital, labour, goods, and services fall. Despite this, the relative prices of these assets may remain unchanged. Consumers may actually find Deflation through the purchase of more goods and services with the similar nominal income over time. 

The decrease in money supply or financial instruments that may be redeemed by money is the primary cause of monetary deflation.

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