Heavy use of long-term debt may be detrimental in a deflationary economy because:
A) the debt may be repaid in more "expensive" dollars.
B) nominal interest rates exceed real interest rates.
C) inflation is associated with the peak of a business cycle.
D) the debt may be repaid in "cheaper" dollars.

Question

Quizplus · Accepted Answer

In a deflationary economy, prices are falling, which increases the purchasing power of money over time. This means that when a company has to repay a long-term debt, they may have to use more dollars than when they initially borrowed the money. As a result, heavy use of long-term debt may be detrimental in a deflationary economy because the debt may be repaid in more "expensive" dollars.

Heavy Use of Long-Term Debt May Be Detrimental in a Deflationary