Classify The Statements As True Or False By Placing Them In The Correct Category.
True
False
Answer Bank
Deflation often results in a decrease in aggregate demand.
Deflation occurs when the aggregate price level falls.
Deflation is a theoretical possibility but almost never occurs.
Deflation does not affect people in the economy uniformly. Some people are made better off and others are made worse off.
Deflation is when the rate of inflation decreases.
The correct answer and explanation is :
True Statements:
- Deflation often results in a decrease in aggregate demand.
- Deflation occurs when the aggregate price level falls.
- Deflation does not affect people in the economy uniformly. Some people are made better off and others are made worse off.
False Statements:
- Deflation is a theoretical possibility but almost never occurs.
- Deflation is when the rate of inflation decreases.
Explanation:
True Statements:
- Deflation often results in a decrease in aggregate demand:
When the price levels in the economy fall (deflation), it often signals a weak economy. Consumers and businesses might expect further price declines, leading them to postpone purchases. This can cause a decline in consumption and investment, which decreases overall demand (aggregate demand). The reduction in demand can exacerbate economic downturns. - Deflation occurs when the aggregate price level falls:
This is the definition of deflation. The term “deflation” refers to a persistent decrease in the overall price level of goods and services in an economy over time. Unlike inflation, where prices rise, deflation means that, on average, prices are falling. - Deflation does not affect people in the economy uniformly. Some people are made better off and others are made worse off:
Deflation’s impact varies across individuals and sectors. Debtors are typically worse off during deflation because the real value of their debt increases. In contrast, individuals with fixed incomes might benefit because their purchasing power improves. However, firms with high fixed costs may also struggle during deflation, as lower prices might reduce their revenue without decreasing costs.
False Statements:
- Deflation is a theoretical possibility but almost never occurs:
Deflation has occurred in real-world economies, most notably during the Great Depression of the 1930s. Though less common than inflation, deflation is not merely a theoretical possibility and has been seen in historical events. - Deflation is when the rate of inflation decreases:
This is a misconception. Deflation refers to an actual decrease in the general price level, while a decrease in the rate of inflation means that inflation is slowing but prices are still rising, just at a slower pace. Deflation means prices are falling, which is different from merely slowing inflation.