Why is deflation a problem?

Answer 1

Deflation is a situation where the prices of goods and commodities in a country are going down. i.e., there is negative inflation. This is caused due to reduced supply of Money/credit.

The answer for whether Deflation is good or bad depends on what causes the fall in price of goods.

If the prices go down because of excess supply/production of goods then it is good for the economy. Everyone can afford such items and the Gross per capita consumption would go up.

If the prices go down because of lack of liquidity in the economy then it is a problem. Deflationary economic situations usually are considered the precursor for depressions or recessions. During such times there would be a great demand for money but the supply would be lesser (that is people cannot afford it) During such situations the economy would go into shambles.

There would be unemployment, people cannot get loans from banks, banks do not have cash to lend to the public, the government doesn't have money to infuse into the economic system to stimulate it etc.