What is deflation?
Correct answer
Answer C: A sustained fall in the general price level.
Quick explanation
Deflation is the opposite of inflation. The general price level falls, so the same amount of money can, in principle, buy more.
Detailed explanation
Inflation is the rate of change in the price level. Disinflation describes a fall in that rate. If inflation falls from 8 to 3 percent, for example, prices still rise on average, but more slowly. The higher price level already reached is not reversed.
Deflation, by contrast, occurs when the rate of change in the general price level becomes negative. A broad basket then costs less on average than in the comparison period. As with inflation, a fall in the price of one product is not enough. The change must be broad enough to lower the general price level.
The terms are often confused because headlines refer to falling inflation. They usually mean disinflation, not falling prices. This distinction also matters for purchasing power: with positive but lower inflation, money still loses purchasing power, just more slowly. During deflation, its purchasing power against the broad basket increases. Deflation's economic consequences depend on its cause, duration, expectations and indebtedness, and are not automatically positive.
Example or everyday application
A broad basket becomes cheaper than in the previous year. This differs from a single electronic product getting cheaper because of new technology.