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With reference to the inflation, consider the following statements:
1. Deflation is the decrease in the level of inflation.
2. Disinflation is a general decline in prices for goods and services.
Which of the statements given above is/are correct?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'D'. Can you explain this answer?
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Verified Answer
With reference to the inflation, consider the following statements:1. ...
- Deflation is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy. During deflation, the purchasing power of currency rises over time. Hence statement 1 is not correct.
- Deflation causes the nominal costs of capital, labor, goods, and services to fall, though their relative prices may be unchanged.
- By definition, monetary deflation can only be caused by a decrease in the supply of money or financial instruments redeemable in money. Reduced investment spending by the government or individuals may also lead to this situation.
- Deflation leads to a problem of increased unemployment due to slack in demand.
- Disinflation is a temporary slowing of the pace of price inflation and is used to describe instances when the inflation rate has reduced marginally over the short term. Hence statement 2 is not correct.
- Unlike inflation and deflation, which refer to the direction of prices, disinflation refers to the rate of change in the rate of inflation.
- A healthy amount of disinflation is necessary since it prevents the economy from overheating.
- Deflation is represented as a negative growth rate, such as -1%, while disinflation is shown as a change in the inflation rate, say, from 3% one year to 2% the next. Disinflation is considered the opposite of reflation, which occurs when a government stimulates an economy by increasing the money supply.
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With reference to the inflation, consider the following statements:1. Deflation is the decrease in the level of inflation.2. Disinflation is a general decline in prices for goods and services.Which of the statements given above is/are correct?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'D'. Can you explain this answer?
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