Which of the following is a likely result of deflation in an economy?
A. Consumers buy more goods quickly.
B. Businesses raise prices to make profits.
C. People delay purchases, expecting lower prices.
D. The central bank raises interest rates
Answer (1)
The correct answer is C. During deflation, prices fall over time. At first, this may seem good, but it actually causes people to delay spending because they think prices will go down more. For example, a student saving for a laptop might decide to wait a few months hoping for a cheaper price. If millions do the same, businesses earn less, which can lead to job losses and a slower economy. Deflation happened in Japan in the 1990s, and it led to years of very low growth.
