Economics • Economic BasicsHard
Analyze the implications of a deflationary spiral in a market economy. Which sequence of macroeconomic events best characterizes this condition?
A. Falling prices lead consumers to postpone purchases, reducing aggregate demand, causing further price drops and rising unemployment✓ Correct Answer
B. Rising investment spending expands production capacity, driving down prices while boosting real wages and employment
C. Central bank monetary expansion lowers borrowing costs, fueling asset price bubbles and currency depreciation
D. Higher tax collections contract government spending, stabilizing the price level through fiscal austerity
💡 Solution & Explanation
A deflationary spiral occurs when falling price expectations cause consumers and businesses to defer spending, depressing aggregate demand further and forcing sellers to cut prices and output more. Real debt burdens also escalate during deflation because nominal liabilities remain fixed while incomes shrink. Central banks combat this through aggressive quantitative easing to anchor inflation expectations.
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