The main disadvantages of deflationary policies is

Step 1: Analyze the question The question asks for the main disadvantage of deflationary policies.

Step 2: Explain the concept Deflationary policies are measures a government or central bank uses to reduce the general price level, usually to fight inflation. Examples include:

• Raising interest rates
• Increasing taxes
• Cutting government spending
• Reducing the money supply (for example, through credit controls)

These measures reduce total spending (aggregate demand) in the economy.

Step 3: Work through the effects When people and the government spend less, the following chain follows:

1. Demand for goods and services falls.
2. Firms sell less, so production is cut back.
3. Firms reduce output and lay off workers.
4. Unemployment rises.

Now check each option:

• A. Full employment: This is a benefit, not a disadvantage, and deflationary policy tends to reduce employment.
• B. Increasing cost of living: Deflationary policy aims to lower prices, so this is the opposite of its effect.
• C. Improved standard of living: This is a positive outcome, not a disadvantage.
• D. Unemployment: This is the classic drawback, because reduced spending leads to reduced output and job losses.
• E. Underemployment: This can occur, but the standard and most direct textbook disadvantage is unemployment.

Step 4: Answer The correct answer is D. unemployment in the country.

Tip: Remember the trade-off: inflation control costs jobs. Deflationary policy lowers prices but at the price of higher unemployment. In economics exams, "deflationary policy → unemployment" is a very common pairing. Similarly, "inflationary policy → rising cost of living."