Which of the following is a key reason why deflation is harmful to an economy?
A. It causes the government to collect more taxes
B. It encourages people to spend more money
C. It delays consumption and investment
D. It improves the value of all bank loans
Answer (2)
The correct answer is C. It delays consumption and investment.Deflation means prices are falling over time. When people expect prices to be lower in the future, they tend to delay buying goods and services or investing, hoping to get a better deal later. This reduces overall demand, which can slow down economic growth, lead to lower profits for businesses, and increase unemployment. This delay in spending and investment is a major reason why deflation is harmful to an economy.
The correct answer is letter C. It delays consumption and investmentDeflation seems like a good thing at first because prices go down—but in reality, it discourages people and businesses from spending. When consumers see prices dropping, they think, “Why buy now if it’ll be cheaper next week?” This behavior is dangerous because it slows down economic activity.In the Philippines, imagine farmers delaying the purchase of fertilizers or machinery because prices might drop next month. Or people holding off buying new appliances. When this happens, businesses lose income, stop expanding, or even lay off workers. Over time, this leads to higher unemployment and even a possible recession.Investment also slows down during deflation. Business owners are less confident that they can recover the cost of expanding because the prices of their products are falling. So they wait instead of acting, which slows down economic recovery.Countries like Japan have struggled with deflation for decades. Many of their citizens choose to save instead of spend, which leads to sluggish growth and fewer job opportunities. That’s why deflation is seen as a trap—once people expect prices to keep falling, it becomes a cycle that's hard to escape.
