When both prices and money income fall, the situation is called

When both prices and money income fall, the situation is called

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When both prices and money income fall, the situation is called

    1. Disinflation
    2. Recession
    3. Deflation
    4. Anti-inflation

 Correct Answer: Deflation

Answer Explanation

In deflation, both prices and money income decline at the same time. As the prices of goods and services recede, and simultaneously, individuals’ income contracts, deflation presents the economy with challenges. This economic backdrop initiates a cycle of reduced consumer spending, diminished business revenues, and potential economic stagnation.

The term deflation is used to describe a prolonged contraction in the overall price level, which causes a loss of purchasing power. Deflation becomes more severe when both prices and money incomes decline at the same time. The shift in consumer behavior dampens demand, prompting businesses to lower prices in an effort to attract buyers. When consumers become cautious, they anticipate further price decreases. Deflation can be perpetuated by this response, resulting in reduced economic activity, decreased investments, and prolonged economic challenges.

Why the other options are not correct

a. Disinflation:

It is defined as a slowing of inflation rates, implying that prices are still rising, albeit more slowly. It does not envisage a situation in which both prices and money income are decreasing simultaneously. So, this option is incorrect.

b. Recession :

An economic recession is marked by high unemployment and a decrease in consumer spending. Despite the fact that a recession may lead to a decline in money income, it does not necessarily result in both a decrease in prices and a decline in money income simultaneously. This option is incorrect because it does not result in both a decrease in both price and money.

 d. Anti-inflation:

The term “anti-inflation” in general refers to measures undertaken by policymakers to counter or alleviate inflationary pressures. However, it does not adequately describe the multifaceted economic situation where both prices and money income are decreasing. This option is also not correct because  it does not result in both a decrease in both price and money

Conclusion

It is clear from Deflation that both prices and money income undergo a dual descent, resulting in a complex interplay of economic dynamics. In such a situation, economic stability can be unsettled, consumer confidence can be eroded, and business viability can be undermined.

While terms like disinflation, recession, and anti-inflation possess relevance within specific economic contexts, they fail to capture the intricate dynamics of deflation when both prices and money income simultaneously decrease. In order to develop effective strategies and policies for mitigating deflation’s adverse effects and facilitating sustainable economic growth, policymakers, economists, and individuals alike must have a comprehensive understanding of it within this context.

If inflation is allowed to continue without any check, it is known as

Bibisha Shiwakoti
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