If falling prices cause an expectation of even lower prices in the future,this argues for a relatively ________ AD curve,thus ________ the Pigou effect.
A)steep,weakening
B)steep,intensifying
C)flat,weakening
D)flat,intensifying

Question

Quizplus · Accepted Answer

If falling prices cause an expectation of even lower prices in the future, consumers will delay their purchases, which will shift the aggregate demand (AD) curve to the left, making it relatively steep. This will weaken the Pigou effect, which suggests that lower prices can stimulate economic activity by increasing real money balances and consumption. A steep AD curve would imply that a given decrease in prices would lead to a bigger decrease in output and employment, thus reducing the effectiveness of monetary policy in stabilizing the economy.

If Falling Prices Cause an Expectation of Even Lower Prices