In 2009, Deutsche Bank warned that the UAE might face deflation, which is a general decline in overall prices. Which of the following is the result of deflation?
Explanation
Deflation, which is a general decrease in price, leads to shrinking employment, decrease in income, and defaults on loans. Ultimately, it leads to economic recession.
Key Takeaway: Deflation prevents monetary policy from stabilizing the economy because of a mechanism called the liquidity trap, which means any further increase in the money supply will not stimulate the economy any further. Some people think inflation is bad, but deflation is way worse. Think of it this way--if prices were going down, wouldn’t you wait to buy? Deflation can bring a capitalist economy to a grinding halt.
