Which of the following best explains the difference between disinflation and deflation?
A. Disinflation is good for the poor, while deflation helps the rich.
B. Disinflation means slowing price increases, while deflation means actual price drops.
C. Disinflation and deflation are exactly the same.
D. Disinflation increases inflation, while deflation decreases GDP.
Answer (1)
The correct answer is B. Disinflation refers to a slowing down of the inflation rate—prices are still increasing, but more slowly. Deflation means the general price level is decreasing, and that’s usually bad for the economy because it discourages spending and investment. For example, if the inflation rate drops from 6% to 4%, that’s disinflation. But if the inflation rate goes negative, like −2%, that’s deflation. Disinflation can be a sign of economic improvement, while deflation may lead to recession.
