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

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BlackTom AI · Accepted Answer

When an economy grows very weakly, demand is subdued and prices tend to fall or remain under pressure as firms compete and spending slows. 
Option a: 'negative nominal interest rate'—While central banks may try to stimulate the economy by cutting rates, a negative nominal rate is not a guaranteed or universal consequence of very weak growth. It depends on policy decisions and the inflation outlook; not all economies adopt or sustain negative rates in such a scenario. 
Option b: 'deflation'—This is a plausible and common consequence. With weak growth, weak demand can lead to downward pressure on the general price level, i.e., deflation, as firms lower prices to attract buyers and debt burdens become harder to service in real terms. 
Option c: 'Increased cost of debt'—Weak growth can raise perceived risk and borrowing costs, but the cost of debt for borrowers depends on monetary policy, credit conditions, and inflation expectations. It is not a guaranteed outcome in all cases, especially if policymakers keep rates low or liquidity plentiful. 
Option d: 'All'—Since not every one of the preceding statements is guaranteed (e.g., negative nominal rates are not automatically triggered everywhere, and increased debt costs are not a universal outcome), this option overstates the set of consequences. 
Putting it together, the most consistent and direct consequence given very weak growth is deflation, while the other options describe possible but not certain or universally applicable outcomes.

BFC3240 - S2 2025 Mock Exam

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

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