Which of the following is a major problem with deflation?
A) Money loses value so rapidly that economic agents will be reluctant to hold money.
B) Economic agents tend to put off purchases in anticipation of lower prices for goods and services, leading to a downward spiral in economic activity.
C) Low prices for goods and services tend to result in massive shortages in most markets.
D) Money supply cannot keep pace with consumption spending.

Question

Quizplus · Accepted Answer

Deflation can lead to a spiral of decreasing economic activity because when prices are falling, consumers may delay purchases in the hope of further price drops. This leads to a decrease in demand for goods and services, causing producers to reduce production and cut jobs, further depressing demand. This vicious circle can lead to a deep economic recession or depression.

Which of the Following Is a Major Problem with Deflation