The reduction in aggregate demand caused by deflation:
A) further reduces prices, causing a deflationary spiral.
B) will decrease production and increase prices, causing inflation to adjust the price level.
C) further reduces prices, causing aggregate supply to shift left back to long-run equilibrium.
D) will decrease production and increase prices, causing a deflationary trap.

Question

Quizplus · Accepted Answer

Deflation can lead to a decrease in aggregate demand as consumers and businesses delay spending in the hopes of further price reductions. This decrease in demand can lead to further price reductions, creating a deflationary spiral.

The Reduction in Aggregate Demand Caused by Deflation