Expectations of either inflation or deflation can create vicious spirals and damaging results for the economy.

Question

Quizplus · Accepted Answer

Expectations of inflation can lead to increases in prices and wages, creating a self-perpetuating cycle of inflation. Similarly, expectations of deflation can lead to decreased spending and investment, causing a decline in economic activity and further deflationary pressures. These vicious spirals can have damaging effects on the economy, making it difficult to control inflation or deflation without first addressing expectations.

Expectations of Either Inflation or Deflation Can Create Vicious Spirals