Question

Which of the following is true about deflation?

a. Deflation occurs when the inflation rate increases at a decreasing rate.
b. Deflation occurs when the inflation rate becomes negative.
c. Deflation occurs when the price level falls.
d. Deflation can be defined as a negative price level.

Answer 1

Deflation is when the inflation rate becomes negative and is characterized by falling prices which increase the purchasing power of money. It can be problematic for economic recovery efforts during a recession.

Step-by-step explanation:

Deflation occurs when the inflation rate becomes negative. This happens when, instead of prices generally increasing as they do during inflation, they decline, meaning money can buy more goods and services over time. As such, deflation is characterized by a decrease in the general price level of goods and services, not merely a decrease in the rate of inflation nor a negative price level itself. During episodes of deflation, money's purchasing power increases compared to the period when inflation is present. However, deflation can pose significant challenges for economic recovery, especially during a recession, because it may hinder effective monetary policy interventions.