Your Roommate Argues That He Can Think of No Better

question 28

Multiple Choice

Your roommate argues that he can think of no better situation than living in a deflationary economy because prices of goods and services would continuously fall.You disagree and argue that during a deflation, people can be made worse off because

• A)the purchasing power of people's incomes would increase.
• B)the purchasing power of the currency would decrease.
• C)the value of the real interest rate will drop below the nominal interest rate.
• D)borrowers will have to pay increasing amounts in real terms over time.
• E)the value of taxes collected by government will fall.

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Definitions:

Implicit Costs

Implicit costs are the opportunity costs of using resources owned by the business for production instead of lending, selling, or renting them out.

Accounting Profits

The net income for a company determined by subtracting total expenses from total revenues, according to generally accepted accounting principles (GAAP).

Short Run

A period of time during which at least one factor of production is fixed, usually considered in economic models and analyses.

Long Run

A period of time in economics sufficiently long to allow for all inputs to production, such as plant and equipment, to be varied (as opposed to just the amount of labor or raw materials).