A substantial decrease in the aggregate price level that reduces firms' net worth may stall a recovery from a recession. This process is called
A)debt deflation.
B)moral hazard.
C)insolvency.
D)illiquidity.

Question

Quizplus · Accepted Answer

Debt deflation is a process in which the decrease in the aggregate price level leads to an increase in the real value of nominal debt, causing a decrease in firms' net worth and leading to insolvency. This can stall economic recovery from a recession. Moral hazard refers to the incentive of individuals to take risks because they are protected from the negative consequences. Insolvency is the state of being unable to pay one's debts, which can be caused by debt deflation but is not the process itself. Illiquidity is the state of being unable to convert assets into cash quickly, which may be a result of insolvency but is not the same as debt deflation.

A Substantial Decrease in the Aggregate Price Level That Reduces