#1
Deflation is characterized by which of the following?
Decrease in the general price level of goods and services
ExplanationDeflation entails a decrease in overall prices.
#2
Which of the following is a potential consequence of deflation?
Decreased real wages
ExplanationDeflation can lead to lower real wages.
#3
Which sector of the economy is most affected by deflation?
Housing market
ExplanationThe housing market is particularly sensitive to deflationary pressures.
#4
During deflation, what typically happens to asset prices?
Asset prices decrease
ExplanationDeflation tends to reduce asset values.
#5
Which country experienced prolonged deflation during the 1990s?
Japan
ExplanationJapan faced deflation for an extended period in the 1990s.
#6
Deflation can lead to which of the following effects on debt?
Increase in the real value of debt
ExplanationDeflation makes debts more burdensome in real terms.
#7
Which of the following is NOT a cause of deflation?
Expansionary fiscal policy
ExplanationExpansionary fiscal policy typically leads to inflation, not deflation.
#8
What is the relationship between deflation and the Phillips curve?
Deflation shifts the Phillips curve to the left
ExplanationDeflation moves the Phillips curve indicating higher unemployment and lower inflation.
#9
What is the role of expectations in deflationary spirals?
Expectations can reinforce deflationary pressures
ExplanationNegative expectations can exacerbate deflation.
#10
How does deflation impact investment decisions?
Deflation discourages investment due to reduced profits
ExplanationLower prices decrease profit margins, discouraging investment.
#11
What is the 'liquidity trap' in the context of deflation?
A situation where nominal interest rates are close to zero, but savings do not stimulate borrowing and spending
ExplanationLiquidity trap occurs when monetary policy becomes ineffective.
#12
What is debt deflation?
A process where the value of debt increases in real terms due to deflation
ExplanationDebt deflation occurs when debt becomes more expensive in real value.