| Consider the following statements |
| 1. Deflation is a decrease in the general price level of goods and services. |
| 2. Deflation is the negative inflation rate which falls below zero percent. Which of the statements given above is/are correct? |
A) Only 1
B) Only 2
C) Both 1 and 2
D) neither 1 nor 2
Correct Answer: C
Solution :
A reduction in money supply or credit availability is the reason for deflation in most cases. Reduced investment spending by government or individuals may also lead to this situation. Deflation leads to a problem of increased unemployment due to slack in demand. Please note that, Deflation is different from disinflation as disinflation implies decrease in the level of inflation whereas on the other hand deflation implies negative inflation.
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