[Solved] Which of the following best explains why deflation can lead to a deflationary spiral? — Ans: Falling prices reduce business profits, leading to layoffs and lower demand | Economic Awareness

Economic Awareness - Sectors of Indian Economy

Which of the following best explains why deflation can lead to a deflationary spiral?

AConsumers increase spending anticipating higher prices

BGovernment increases spending to boost inflation

CFalling prices reduce business profits, leading to layoffs and lower demand

DCentral bank raises interest rates to control inflation

Step-by-Step Solution

Step 1: Understand deflationary spiral
A deflationary spiral occurs when falling prices reduce profits, causing layoffs and further demand reduction.
Step 2: Analyze options
Only the option describing falling prices reducing profits and demand matches the deflationary spiral concept.
Final Answer:
Falling prices reduce business profits, leading to layoffs and lower demand → Option C
Quick Check:
Deflationary spiral = falling prices reduce profits and demand ✅

Quick Trick: Deflationary spiral worsens economic slowdown.

Common Mistakes:

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