Deflation Encourages Spending Delays

Steps:

• Deflation is a sustained decrease in the general price level of goods and services.
• When prices fall, consumers expect further declines, leading them to postpone purchases.
• This delay in spending reduces economic activity and can worsen deflation.
• Thus, consumer behavior directly responds to falling prices by holding onto money.

Why A is correct:

• Deflation increases the purchasing power of money over time, so consumers delay spending to buy at even lower future prices, per the definition of deflation as falling price levels.

Why the others are wrong:

• B: Central banks lower interest rates during deflation to stimulate borrowing and spending.
• C: Deflation makes domestic goods relatively cheaper, likely decreasing imports.
• D: Deflation raises the real value of money as its purchasing power increases.

Final answer: A