The problem of debt deflation deepens during an economic slump because:
A) borrowers have to reduce spending to pay off debts.
B) the Fisher effect raises the nominal interest rate during deflation.
C) lenders have to reduce spending to accommodate higher returns from loans.
D) the zero bound on the nominal interest rate is broken.

Question

Quizplus · Accepted Answer

During an economic slump, borrowers are more likely to have difficulty making payments on their debts, which results in reduced spending. This reduction in spending can then lead to further economic contraction, as businesses see decreased demand for their products and services, leading to layoffs and lower wages. This cycle can become self-reinforcing and difficult to break, exacerbating the problem of debt deflation.

The Problem of Debt Deflation Deepens During an Economic Slump