What happens to demand in deflation?

Now the next question would be: 'what would happen to demand for goods?' Since everyone in the village has one of the items. Hence, no one needs any more, so the conclusion would be that price will also fall as sellers try to find someone to take them off their hands.

Then there could be a question of 'what about the demand for money?' The rule of thumb is to measure the demand for money by how much people are willing to pay in order to borrow. If inflation is high, then interest rates will be increase to compensate for loss of purchasing power.

If demand for money rises banks can charge more to loan it. This increase in interest would dampen the demand for money and interest rates will also fall.