Suppose in 2012 in New Zealand, there are deflationary pressures and prices drop by 20 percent throughout the economy. All else being equal, expectations of increasing deflation should:

When people expect that deflation which is the general reduction in prices, will occur, they will try to take advantage of it by reducing their consumption in the present so that they can resume consumption when prices are lower so as to reduce their cost of consumption.

This will have the effect of reducing Aggregate Demand which will force the Aggregate Demand curve to the Left which will further exacerbate the effects because prices will then fall to the new point of intersection between AD and the Aggregate Supply curve.

andromache andromache · Answer 2 · 2022-04-12T11:33:28+02:00

When the prices are fall by 20 percent throughout the economy so here it should be shifted to AD curve to the left hand side.

Impact on deflation:

In the case when there is deflation that means reduction in the price so here there should be decreased in the consumption also it decrease the consumption cost.

Due to this the Aggregate Demand should be decreased due to this, it should be shifted to the left hand side because of the decreasing in the price

Therefore, When the prices are fall by 20 percent throughout the economy so here it should be shifted to AD curve to the left hand side.

This question is incomplete.The options for this question are;

A. Cause a movement along an AD curve or a change in quantity of AD

B. shift the AD curve to the left

C. leave the AD curve unchanged

D. shift the AD curve to the right

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