Price deflation:
A) Tends to force both real and nominal interest rates lower
B) Tends to increase investment spending and the development of new jobs
C) Will cause borrowers to gain at the expense of lenders
D) All of the above
E) None of the above

Question

Quizplus · Accepted Answer

Price deflation tends to increase the real burden of debt, as the value of money increases, making it harder for borrowers to pay back their loans. This can lead to decreased investment spending and potentially fewer new jobs, as businesses and consumers cut back on spending. Additionally, deflation can lead to higher real interest rates as nominal rates adjust downward less quickly than prices, making lending less attractive. Therefore, deflation does not tend to force both real and nominal interest rates lower, nor does it tend to increase investment spending and the development of new jobs. Instead, it causes borrowers to lose at the expense of lenders, as the real value of the money they have to pay back increases.

Price Deflation