The debt-deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth ______, and that creditors have ______ propensity to consume than debtors.
A) from debtors to creditors; a smaller
B) from debtors to creditors; a larger
C) from creditors to debtors; a smaller
D) from creditors to debtors; a larger

Question

Quizplus · Accepted Answer

The debt-deflation hypothesis posits that unexpected deflation increases the real value of debt, effectively transferring wealth from debtors to creditors. Since creditors generally have a smaller propensity to consume than debtors, this transfer reduces overall consumption and can lead to a fall in income.

The Debt-Deflation Hypothesis Explains the Fall in Income as a Consequence