Deflation is a problem because it:
A) increases the value of debt, making it harder to pay it back.
B) increases the time it takes for monetary policy to be effective.
C) increases shoe-leather costs.
D) reduces the effectiveness of fiscal policy in stimulating the economy.

Question

Quizplus · Accepted Answer

Deflation increases the real value of debt, making it harder to pay back. As prices fall, the amount of money owed in debt remains the same, making it more difficult for people and firms to pay off their debt. This can lead to defaults and bankruptcies, causing further economic problems.

Deflation Is a Problem Because It