How might deflation set off further deflation?
A)Falling prices can increase the nominal interest rates in the economy and reduce consumption.
B)If prices are falling in the economy, this will cause a decrease in the number of goods exported from the country and thus cause prices to fall further.
C)Falling prices may cause people to defer spending in expectation of further lower prices, and this leads to more deflation.
D)Falling prices cause firms to increase production, and the increase in supply causes prices to fall further.

Question

Quizplus · Accepted Answer

Falling prices may cause people to defer spending in expectation of further lower prices, and this leads to more deflation. This leads to a decrease in the demand for goods and services, further reducing prices. As a result, deflation sets off a vicious cycle, where lower prices lead to lower demand, which leads to lower prices. This vicious cycle can cause a prolonged period of deflation, which is difficult to break without government intervention.

How Might Deflation Set Off Further Deflation