An economic downturn which causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness results in ________.
A) asset bubbles
B) rising interest rates
C) debt deflation
D) financial recovery

Question

Quizplus · Accepted Answer

This situation is referred to as debt deflation, where a decrease in price levels leads to an increase in the real value of debt, making it harder for firms to pay off their debts and leading to a deterioration in their net worth. This can lead to a vicious cycle of further economic downturn and worsening of the debt burden. This is not related to asset bubbles, rising interest rates or financial recovery.

An Economic Downturn Which Causes the Price Level to Fall