Which of the following BEST describes deflation?
A. A general increase in prices and decrease in purchasing power
B. A drop in prices that encourages more consumption
C. A decrease in prices that may lead people to delay purchases
D. A situation where wages increase faster than prices
Answer (1)
The correct answer is letter C. A decrease in prices that may lead people to delay purchasesDeflation happens when the overall price level of goods and services goes down. At first glance, this might seem like a good thing, but it often causes people to delay their purchases, hoping prices will drop even more. This behavior can hurt businesses and lead to lower production, layoffs, and even a recession.In Japan, for example, deflation has been a big problem for years. Many people stopped buying big-ticket items like electronics and cars, thinking they would be cheaper later. This delayed spending reduced business profits, led to less hiring, and caused the economy to slow down further. The Philippines hasn't had major deflation yet, but it's a risk during times of economic uncertainty, especially when people lose jobs and reduce spending drastically.
