When an economy experiences deflation, investment will:
A) decrease, because businesses will not take out loans that will increase in value over time.
B) increase, because businesses will take out loans that will increase in value.
C) decrease, because businesses will spend cash instead of borrowing it.
D) increase, because businesses will spend cash instead of borrowing it.

Question

Quizplus · Accepted Answer

With deflation, prices are falling, which means the value of money is increasing over time. This disincentivizes businesses from taking out loans because the loans will increase in value over time, making it more difficult to pay them back. Therefore, investment will decrease.

When an Economy Experiences Deflation, Investment Will