A continuous cycle of deflation causing prices to drop dramatically and decreased demand is known as what phenomenon?

The phenomenon described in the question is known as a deflationary spiral. A deflationary spiral is a self-reinforcing cycle of falling prices and decreased demand in an economy. As prices drop, consumers and businesses delay purchases in anticipation of even lower prices in the future. This leads to a further decrease in demand, causing businesses to reduce production and cut prices even more. This cycle continues, resulting in a downward spiral of prices and economic activity.

Option A, deficit deflation, refers to a situation where deflation is caused by a government's budget deficit. This is not the phenomenon described in the question.

Option C, liquidity trap, refers to a situation where monetary policy becomes ineffective because interest rates are already very low and individuals and businesses prefer to hold cash rather than invest or spend. This is not directly related to the phenomenon described in the question.

Option D, bubble bursting, refers to a sudden collapse in the value of an asset or market that was previously overvalued. While this can lead to deflation in certain cases, it does not capture the continuous cycle of deflation and decreased demand described in the question.

Therefore, the correct answer is B, deflationary spiral, as it accurately describes the phenomenon of a continuous cycle of deflation causing prices to drop dramatically and decreased demand.