The economy of East Paragon has been experiencing deflation for the last few months, with prices of goods and services declining. Because firms are charging lower prices, they expected higher sales. However, consumption spending did not increase much, resulting in substantial losses for these firms. Which of the following, if true, explains why consumers did not increase consumption in spite of falling prices? A. The government recently announced plans to withdraw subsidies on petroleum products. B. The rate of unemployment in this country is lower than most other developing countries. C. The interest rate offered on bank deposits is low. D. Most people were expecting prices to decline further. E. The government lowered taxes on corporate profits earlier this year.

D) Most people were expecting prices to decline further.

Explanation:

A is wrong because: If the government announces a plan to withdraw subsidies to petroleum products, the inflation rate should increase, and the economy could enter a recession. Even large and rich economies like the US suffer a lot when the price of gas and other petroleum products increases. But if the consumers anticipated a steep rise in inflation, they should have increased their current purchases, this is not the case.

B is wrong because: When the unemployment rate is very low, the economy is usually growing, and a growing economy has some degree of inflation, this is not the case.

C is wrong because: If the interest rates on deposits was really low, then the marginal propensity to consume would be higher and spending would also be hire, this is not the case.

E is wrong because: If the government lowers taxes, then the economy should rebound and the companies would be making higher profits, this is not the case.