Deflation:
A) reduces the level of aggregate demand in the economy.
B) increases the level of aggregate demand in the economy.
C) does not affect the level of aggregate demand in the economy.
D) reduces the level of aggregate supply in the economy.

Question

Quizplus · Accepted Answer

Deflation is a decrease in the general price level of goods and services in an economy over a period of time. This implies that the purchasing power of money has increased. As a result, consumers tend to postpone their purchases in expectation of further price declines leading to a fall in the level of aggregate demand. This reduction in aggregate demand has a negative impact on economic growth and may lead to recession.