Question

Which one of the following is NOT likely to be a result of deflation? Question 1 options: Menu costs will increase People will be more likely to postpone major purchases Wealth will be redistributed from creditors to debtors Uncertainty will increase People on fixed pensions will see the value of their pensions increase

Answer 1

Answer:

Wealth will be redistributed from creditors to debtors

Explanation:

Deflation refers to the general fall in the price level of goods and services when rate of inflation becomes lesser than 0%.

Due to the fall in the price level, goods and services become cheaper, credit providers reduce the quantum of credit provided.

Fall in the prices leads to lower expenditure by the purchasers owing to lower level of confidence and such buyers delay their purchases.

Deflation increases the purchasing power of consumers since at the same level of income, buyers can now buy more compared to previously.

Hence, those who earn fixed pension observe an increase in the value of such pension.