An economy is moving towards very weak growth. What consequences can be expected on the horizon?

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BlackTom AI · Accepted Answer

The question asks about consequences that can be expected when an economy moves toward very weak growth. Below is a breakdown of each option to understand why the combined result could be the most comprehensive.

Option a: negative nominal interest rate. In a scenario of persistently weak growth and weak inflation or deflation pressures, some central banks may adopt unconventional monetary policies, including setting or guiding policy rates into negative territory to stimulate borrowing and spending. While not universal, negative nominal rates are a plausible instrument in a low-growth, low-inflation environment, particularly in small open economies or in regions comfortable with unconventional policy.

Option b: deflation. Weak growth commonly accompanies weak demand and downward pressure on prices, making deflation a plausible outcome. If aggregate demand remains subdued relative to potential output, price levels can stagnate or fall, raising real burden of debt and dampening further spending—consistent with a weak-growth outlook.

Option c: increased cost of debt. In environments of weak growth, even if nominal policy rates are low or negative, borrowing costs can rise in real terms if inflation expectations decline or if credit spreads widen due to risk perceptions. Firms and households facing tighter credit conditions or higher risk premia may see higher effective borrowing costs, especially for longer maturities or riskier borrowers. Additionally, deflation increases the real burden of existing debt, effectively raising the real cost of servicing debt.

Option d: All. Since each of the above scenarios—negative nominal rates, deflation, and higher real debt costs—can plausibly occur in a very weak-growth environment, the combination captures the broad set of potential horizon consequences. While not guaranteed in every economy, the co-occurrence of these effects is consistent with typical macroeconomic dynamics under stagnation or near-stagnation conditions, depending on policy responses and structural factors.

An economy is moving towards very weak growth. What consequences can be expected on the horizon?

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