Question

The debt-deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth ______, and that creditors have a ______ propensity to consume than debtors.

Answer 1

Answer:

The options for this question are the following:

A. from debtors to creditors; a smaller

B. from creditors to debtors; a larger

C. from debtors to creditors; a larger

D. from creditors to debtors; a smaller

The correct answer is A. Debtors to creditors; a smaller

Explanation:

There are two definitions of deflation. Most people believe that it is simply price drop. But debt deflation is what happens when people have to spend an increasing part of their income on debt service contracted by them: pay mortgage debt, pay credit card debt, pay academic loans.

Nowadays, people have to spend so much money on buying a house or paying for education, that they do not have enough money to spend on goods and services, except for contracting more debt with their credit card or with other loans.

Result: the markets are slowing. Deflation means a slowdown in revenue growth. Markets contract, capital investment and employment also decrease and wages fall. That is what is happening, as a result of a deliberate policy, in Europe and in the US. The fall or stagnation of prices is nothing but the result of a smaller volume of income to spend.