Canadian Securities Course (CSC) Level 1 Practice Exam

What is the difference between deflation and disinflation?

1. Both refer to a decrease in price levels, but deflation is rapid and extreme

2. Deflation indicates rising prices, while disinflation signifies stable prices

3. Deflation is a general drop in prices, disinflation refers to partial price decreases

4. Both refer to a slow decrease in prices, but deflation is a temporary phase

The correct answer is: Deflation is a general drop in prices, disinflation refers to partial price decreases

The correct answer highlights that deflation is characterized by a general decline in prices across the economy. This phenomenon typically suggests a decrease in consumer demand and can often lead to reduced economic activity. Disinflation, on the other hand, describes a situation where the rate of inflation is decreasing, meaning prices are still rising, but at a slower rate than before. This implies that while prices might not be falling, the pace at which they increase is slowing down. Understanding these terms is important in the context of economic conditions. Deflation can be harmful because it can lead to a cycle of reduced consumer spending and investment, whereas disinflation may reflect a stabilizing economy where inflation is being controlled but not negating price increases completely.