Skip to content

IAI Actuarial Core Principles · Business Economics · Impact of the macroeconomic environment on business

Which statement best describes the main risk of sustained deflation for businesses and the financial system?

Deflation raises the real value of debt and tends to make consumers delay spending in expectation of lower prices. This reduces demand, profits and investment and can increase loan defaults, which is why it is harmful for firms and the financial system.

  1. AIt lowers the real burden of debt, encouraging heavy borrowing
  2. BIt encourages consumers to bring forward purchases, raising demand
  3. CIt raises the real value of debt and may lead consumers to delay spending, depressing demand and profitsCorrect
  4. DIt reduces the real value of fixed-rate assets held by banks
  5. It always lowers unemployment by cutting real wages

Explanation

Under deflation, debts fixed in nominal terms become heavier in real terms, and expecting lower prices leads consumers to postpone purchases. This depresses demand, profits and investment, and may raise defaults. The other statements describe the effects of inflation or are wrong.

Did you get it right without looking?

One question tells you little. A timed set on Impact of the macroeconomic environment on business shows your real accuracy, how long you take and where you lose marks.

Practise Impact of the macroeconomic environment on businessFree diagnostic mock

More Impact of the macroeconomic environment on business questions