What could be a consequence of a deflationary spiral?

In a deflationary spiral, prices of goods and services decline over time, leading consumers to delay purchases in anticipation of even lower prices in the future. This behavior can result in reduced revenue for businesses, which may then scale back production, lay off workers, and cut investments. As consumer confidence weakens, demand decreases further, perpetuating the cycle of falling prices.

The correct choice indicates that reduced potential returns to businesses and investors is a significant consequence of this spiral. When prices are continually falling, the profit margins for businesses shrink, impacting their ability to invest and grow. Investors may also become cautious, leading to lower levels of investment in the economy. This lack of business investment can stifle economic growth and innovation, which are crucial for long-term financial health.

In contrast, the other options present outcomes that are less likely to occur in a deflationary environment. Increased economic growth typically requires rising consumer spending and business investment, neither of which tends to flourish during periods of deflation. Similarly, higher consumer spending is expected only when confidence is strong, which is generally not the case in a deflationary spiral. While lower interest rates could be a response to attempts to combat deflation, they do not address the broader consequences of reduced returns and