Which of the following is not a reason why governments and central banks worry about deflation? The real value of debt increases. There may be cuts to real wages when unemployment is high. Consumers delay spending. The real value of debt decreases. The real interest will be higher than the nominal interest rate.
Question
Which of the following is not a reason why governments and central banks worry about deflation?
The real value of debt increases.
There may be cuts to real wages when unemployment is high.
Consumers delay spending.
The real value of debt decreases.
The real interest will be higher than the nominal interest rate.
Solution
Answer: Deflation is a decrease in the general price level of goods and services. When deflation occurs, the real value of money increases, allowing one to buy more goods and services.
Among the options provided, the statement "The real value of debt decreases" is not a reason why governments and central banks worry about deflation. In fact, during deflation, the real value of debt increases because the value of money is increasing. This means that borrowers will have to pay back more in real terms than they initially borrowed, which can lead to financial distress and potentially a slowdown in economic activity.
Therefore, the correct answer is:
The real value of debt decreases.
Similar Questions
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