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In the period since the financial crisis of 2007-2009, inflationhas been low in many countries, while a few experienced outrightdeflation. Why might unexpected deflation be of particular concernto someone managing a bank? Unexpected deflation is associated with________ of borrowers, as the nominal value of their assets _______but the dollar amount of their liabilities _______ . This weakenscreditworthiness and can lead to ________ lending as asymmetricinformation problems worsen. In turn, ________ credit supply candiminish economic activity, leading to _________ defaults, adeterioration in the quality of the bank’s balance sheet andultimately to bank insolvency.
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