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In stark contrast, deflation presents a much graver economic challenge. Although prices may drop, this decrease often accompanies rising unemployment and reduced income across society. In a deflationary environment, workers may find themselves losing jobs entirely or facing pay cuts, leading to reduced consumer spending and prolonged economic strife.
A historical perspective highlights the severity of deflation, as seen during the Great Depression. This prolonged period of economic hardship was characterized by deflation, which led to a cycle of falling prices and rising unemployment. With a significant portion of the population unable to find work, economic recovery was painfully slow.