Deﬂation is most likely to occur
A) during the expansionary phase of the business cycle.
B) during the recessionary phase of the business cycle.
C) when the central bank imposes negative nominal interest rates.
D) when the inﬂation premium rises above 10 percent.

Question

Quizplus · Accepted Answer

Deflation is characterized by a sustained decrease in the general price level of goods and services, which means a negative inflation rate. This typically occurs during the recessionary phase of the business cycle when there is lower demand for goods and services, leading to lower prices. Option A is incorrect because expansionary phase of the business cycle usually results in inflationary pressure. Option C is incorrect since negative nominal interest rates imply monetary expansion, which usually leads to higher inflation. Option D is also incorrect as a high inflation premium is indicative of inflationary pressure rather than deflationary pressure.

Deﬂation Is Most Likely to Occur