What are the effects of ‘deflationary expectation’ on consumption, lending and borrowing, business investment and production?...

What are the effects of ‘deflationary expectation’ on consumption, lending and borrowing, business investment and production?

What is a ‘liquidity trap’?

Expert Solution

Deflationary gap is a situation of less employment , output and income.

Here when it feels that deflation will Takes place then consumption will fall because labour get lower wages.

Deflation makes it more difficult for debtors to pay off their debts. Therefore, consumers and firms have to spend a bigger percentage of disposable income on meeting debt repayments. (in a period of deflation, firms will also be getting lower revenue, and consumers will likely to get lower wages).

Part B) liquidity trap- Liquidity trap is a situation when expansionary monetary policy (increase in money supply) does not increase the interest rate, income and hence does not stimulate economic growth. There is a liquidity trap at short term zero percent interest rate.

Rahul Sunny answered 2 years ago

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