Which statement describes a potential consequence of deflation?

• A. Deflation reduces unemployment
• B. Deflation can turn a recession into a depression
• C. Deflation is always bad and never positive
• D. Deflation always increases consumer spending

Answer: (B)

Deflation means a fall in the overall price level. A key effect is that the real burden of debt rises, which can weigh on spending and investment. If people and businesses expect prices to fall further, they delay purchases and investment. That weaker demand leads firms to cut production and lay off workers, pushing unemployment higher. With higher unemployment and weaker demand, the downturn can deepen and persist, potentially turning a recession into a depression. So the most likely significant consequence is a worsening, longer-lasting downturn.

Deflation does not reduce unemployment; it tends to push it up. It isn’t guaranteed to be bad in every situation, but the risk is that a deflationary spell deepens a recession into a depression. And deflation does not automatically increase consumer spending; it often discourages spending as people wait for even lower prices.