Which of the following is a feature of the 'Debt-Deflation' theory associated with Irving Fisher?
A. Deflation always reduces the real burden of debt
B. Falling prices raise the real value of debt, leading to further declines in spending and prices
C. Debt is irrelevant for the business cycle
D. Only inflation causes debt problems
Answer: Option B
Solution (By JKSSB Mock Tests)
Fisher’s debt-deflation theory argues that an initial decline in prices increases the real burden of nominal debt, forcing distressed selling and further price declines in a downward spiral.
Explanation:
Exchange-rate pass-through measures the degree to which a change in the nominal exchange rate is transmitted to import prices and ultimately to consumer prices in the domestic economy.
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