Chapter 34, Problem 5MCQ

To determine

The correct option for Debt inflation

Answer to Problem 5MCQ

From the available options, the correct option is all of the above.

Explanation of Solution

When prices rise, there is a bigger demand for credit, which leads to higher interest rates that are advantageous to lenders. This rise in prices is known as debt deflation, which helps to fuel the great depression. Additionally, it demonstrates how differently different borrowers react to inflation because it allows them to pay back lenders with money that is now worth less than it did when they first borrowed it. Irving Fisher put out the hypothesis that there is a link between real and nominal interest rates and inflation, and that deflation also affects the economy's aggregate demand by lowering it.

Therefore, the correct option is e (all of the above).

Economics Concept Introduction

Introduction: Inflation means there is increase in price of goods and services in the economy which affects the consumption level of the people in country. When there is temporary reduction in price inflation then this is a disinflation in economy. And, the Philips curve represents the inflation and unemployment relationship at different rates in economy.