A bad deflation such as that experienced by Japan over the past decade poses problems
A)for monetary policy because it lowers the real interest rate below the nominal interest rate.
B)for fiscal policy because it raises the ratio of public debt to nominal GDP even if public debt is fixed.
C)for monetary and fiscal policy because it makes it impossible to use these together to shift the IS and LM curves rightward at the same time.
D)for monetary and fiscal policy because it makes it impossible to use these together to shift the IS and LM curves leftward at the same time.

Question

Quizplus · Accepted Answer

In a bad deflation, prices and economic activity are decreasing, which leads to a decrease in nominal GDP. As a result, the ratio of public debt to nominal GDP increases even if public debt is held constant. This poses a problem for fiscal policy as it limits the government's ability to stimulate the economy through spending or tax cuts.

A Bad Deflation Such as That Experienced by Japan Over