Extract H: Economic contraction in Nordlandia

Following the collapse of its technology investment bubble, Nordlandia has entered a period of severe economic stagnation. Real GDP contracted by 1.8% over the past four quarters, while the consumer confidence index fell to a historic low. In response, the Nordlandian monetary authority slashed interest rates to 0.1%, but credit growth remains flat as banks and households focus on deleveraging.

The prolonged lack of aggregate demand has led to a persistent drop in the aggregate price level. The annual rate of inflation, which hovered around 2.4% before the crisis, has fallen to -1.2% this year. Policymakers are deeply concerned that this sustained deflation will trigger a downward spiral, as consumers delay purchases in anticipation of even lower prices, further depressing corporate revenues and worsening the real burden of nominal debt.