Read the article below and then answer the following questions: 

a) Explain the difference between deflation and disinflation referred to in paragraph 1. 

b) Identify and explain the advantages of deflation that are mentioned in the article. 

c) Identify and explain, using an AD/AS diagram, the disadvantages of deflation that are mentioned in the article.

Transcribed Image Text:

Deflation won't impact consumers if short term, say analysts By Julia Chan and Yiswaree Palansamy, 1st March 2019 Malaysia is in a state of disinflation, and not de- flation, contrary to reports stating otherwise, says economist James Alin from University Malaysia Sabah (UMS). The UMS School of Business and Economics lecturer said that the consumer price index (CPI), an indicator for inflation, has de- creased but not gone into the negative as of Janu- ary, 2019. "So actually we are not in deflation yet - just disinflation. The last time the country was in deflation was four years ago," he said. He argues though that deflation has some positives, "Decreases in the consumer prices index can be a good thing in the short run, because prices of goods and services we consume daily are falling. In other words, our disposable income increases. Prices go- ing up and down is an indication that the markets mechanism is working rather well," he said. However, he also contended that the change in pric- es will not affect the average consumer by much, "Actually 45 percent of goods listed are non-dura- ble and perishable items, one can buy more when it is cheaper but is it possible to stock? Most of those are once-in-a-while purchases. You don't buy clothing every day just because it's cheaper. unless you are rich and addicted to shopping. As an individual, they can only consume roughly the same amount of these items categorised in the CPI whether it is more expensive or cheaper," he said naming things like food, furniture, water con- sumption and property. So changes are minimal in impact for consumers. For high-end consumers, it may be of more impact," he said. Alin said that the negative aspect of deflation is when the CPI hits and remains at negative rates over a long period of time, low prices of goods and services may cause small and medium-size firms to go out of business. "This is where the im- pact will be felt. If a person is selling things at low prices, he may not be able to sustain the busi- ness, and this will result in laying off employees or shutting down. Prolonged deflation results in impending recession - when economic growth is negative for two consecutive quarters of a year - and deflation will have worse effects compared to inflation, because interest rates can only be low- ered to zero," he said. "So it is a fine balance - too high prices and peo- ple suffer, too low and companies and employees suffer. It's a tough balance," he said. Source: Adapted from Deflation won't impact Chan and Yiswaree Palansamy, 1st March 2019, consumers if short term, say analysts, by Julia www.malaymail.com