What effect does deflation have on consumption and investment?
A) Deflation increases the rate of both consumption and investment.
B) Deflation slows the rate of both consumption and investment.
C) Deflation slows the rate of investment but increases the rate of consumption.
D) Deflation causes firms and households to consume more and save less.

Question

Quizplus · Accepted Answer

Deflation typically reduces consumption because consumers delay purchases in anticipation of lower prices in the future. It also reduces investment because firms may delay or cancel investment projects due to lower expected profits as prices fall.

What Effect Does Deflation Have on Consumption and Investment