The reduction in aggregate demand caused by deflation:
A) further reduces prices, causing a deflationary spiral.
B) decreases production and raises prices back to their original level.
C) further reduces prices, causing aggregate supply to shift back to its long-run equilibrium.
D) decreases production and increase prices, mitigating the effects of the initial deflation.

Question

Quizplus · Accepted Answer

Deflation leads to a decrease in aggregate demand due to the decrease in consumer spending, investment, and overall economic activity. This can further reduce prices, causing a deflationary spiral where prices and economic activity continue to decline.

The Reduction in Aggregate Demand Caused by Deflation