Macmillan Learning Suppose there is unexpected deflation this year that reduces the aggregate price level. The economy is depicted in the accompanying graph. a. How does deflation affect borrowers and lenders? Borrowers are negatively impacted and lenders are positively impacted. Borrowers are positively impacted and lenders are negatively impacted. Both borrowers and lenders are negatively impacted. Both borrowers and lenders are positively impacted. b. Adjust the graph to show what would happen if those hurt by the deflation adjust their spending because of it. Aggregate price level Real GDP AD LRAS SRAS
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Deflation is bad for the economy because: a. The real interest rate will be increasing, harming borrowers and discouraging investment. b. Nominal GDP will be decreasing, which means the purchasing power of consumers' incomes is going down as well. c. When people expect lower prices, they may refuse to spend their money, causing a collapse in the demand for goods. d. Firms' profits will go down, resulting in a reduction in the supply of goods, causing a recession.
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