Deflation refers to a situation where:
A) Price level falls, and could be caused by a shift of AD to the left
B) Price level falls, and could be caused by a decrease in aggregate supply
C) The rate of inflation falls, and could be caused by a shift of AS to the right
D) The rate of inflation rises, and could be caused by an decrease in aggregate demand

Question

Quizplus · Accepted Answer

Deflation occurs when the overall price level falls, which can often occur when aggregate demand shifts to the left. This decrease in demand results in producers reducing prices to entice consumers to buy their goods and services, causing a downward spiral in prices. While a decrease in aggregate supply can also lead to lower prices, it is not the primary cause of deflation as it does not impact overall demand. The other answer choices are incorrect as they describe situations that are the opposite of deflation.

Deflation Refers to a Situation Where