Deflation erodes economic activity through falling prices

Steps:

• Deflation is a sustained decrease in general price levels, opposite of inflation.
• It creates expectations of further price drops, delaying consumer and business spending.
• Businesses face declining revenues and profits, leading to reduced investment and hiring.
• This spirals into slower growth, higher unemployment, and potential recession.

Why A is correct:

• Deflation reduces business confidence by signaling falling demand and profits, per the expectations-augmented Phillips curve, where price declines amplify economic uncertainty and contraction.

Why the others are wrong:

• B: Deflation boosts export competitiveness by lowering domestic prices relative to foreign ones.
• C: Deflation increases purchasing power, as the same money buys more goods.
• D: Deflation raises real incomes if nominal wages hold steady, since goods cost less.

Final answer: A