Which of the following is a difference between inflation and deflation?
A)The Federal Reserve buys government securities when inflation is a concern, whereas the Federal Reserve sells government securities when deflation is a concern.
B)Inflation increases the unemployment rate, whereas deflation decreases the unemployment rate.
C)A high level of inflation is bad for the economy, whereas a high level of deflation signifies a healthy economy.
D)Inflation is a period of rising average prices across the economy, whereas deflation is a period of falling average prices across the economy.

Question

Quizplus · Accepted Answer

Inflation and deflation are two opposite economic phenomena. Inflation is a period of rising average prices across the economy, meaning the purchasing power of money decreases, whereas deflation is a period of falling average prices across the economy, meaning the purchasing power of money increases. Option A is incorrect because the Federal Reserve buys government securities to inject money into the economy, increasing the money supply, and selling them to reduce the money supply, regardless of inflation or deflation concerns. Option B is incorrect because inflation and deflation have different effects on the economy and employment rates. Option C is incorrect since neither high levels of inflation nor deflation are good for the economy as they can cause economic instability and uncertainty.

Which of the Following Is a Difference Between Inflation and Deflation