Which statement best defines deflation?

Which statement best defines deflation?

• A. A sustained decrease in the average price level of all the goods and services produced in the economy.
• B. A sustained increase in the average price level.
• C. A period of rapid economic growth with rising asset prices.
• D. A temporary rise in prices due to supply shocks.

Answer: (A)

Deflation is when the overall price level for goods and services falls for a sustained period. It reflects a broad, ongoing drop in prices across the economy, not just the price of a few items. This is what price indices like the CPI or GDP deflator track. In contrast, the other scenarios describe prices rising or temporary spikes, not a persistent fall. Deflation can also alter behavior, as people may delay purchases in hopes prices will drop further, which can slow economic activity and affect debt burdens.

Deflation is when the overall price level for goods and services falls for a sustained period. It reflects a broad, ongoing drop in prices across the economy, not just the price of a few items. This is what price indices like the CPI or GDP deflator track. In contrast, the other scenarios describe prices rising or temporary spikes, not a persistent fall. Deflation can also alter behavior, as people may delay purchases in hopes prices will drop further, which can slow economic activity and affect debt burdens.