During deflationary periods, which happens to prices?

During deflationary periods, which happens to prices?

• A. Prices decline
• B. Prices rise
• C. Prices stay the same
• D. Prices fluctuate unpredictably

Answer: (A)

Deflation means the general price level falls. When demand for goods and services drops or supply grows faster than demand (or the money supply tightens), prices move downward across the economy. As a result, the purchasing power of money increases—you can buy more with the same amount of money. This contrasts with inflation (prices rise) and price stability (prices stay about the same). If people expect prices to fall further, they may delay purchases, which can push prices down even more and slow economic activity.

Deflation means the general price level falls. When demand for goods and services drops or supply grows faster than demand (or the money supply tightens), prices move downward across the economy. As a result, the purchasing power of money increases—you can buy more with the same amount of money. This contrasts with inflation (prices rise) and price stability (prices stay about the same). If people expect prices to fall further, they may delay purchases, which can push prices down even more and slow economic activity.