Which of the following explains why an economy that has moved away from long-run equilibrium due to a fall in aggregate demand should avoid deﬂation?
A) Deﬂation causes a rightward shift in the short-run aggregate supply curve.
B) Deﬂation is usually accompanied by an increase in employment.
C) Encouraged by lower prices, households increase the demand for goods and services.
D) Consumers often postpone consumption in the expectation that prices will fall further.

Question

Quizplus · Accepted Answer

Deﬂation can lead to a decrease in consumer spending because individuals expect prices to fall further, which can exacerbate an economic downturn by reducing demand further. This expectation of falling prices can lead to postponed consumption, which in turn can slow down economic recovery.

Which of the Following Explains Why an Economy That Has