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.