Canadian Securities Course (CSC) Level 1 Practice Exam

What is the difference between deflation and disinflation?

1. Both refer to rising prices at a slower rate, but deflation is more severe

2. Deflation is a rise in prices, while disinflation is a fall in prices

3. Deflation is a sustained fall in prices, disinflation is a decline in the rate of price increase

4. Both refer to falling prices, but deflation occurs during economic stability

The correct answer is: Deflation is a sustained fall in prices, disinflation is a decline in the rate of price increase

The correct choice highlights the fundamental distinction between deflation and disinflation. Deflation refers to a sustained decrease in the overall price levels in an economy, indicating a reduction in consumer demand, which can lead to negative economic growth and increased difficulties for businesses and consumers alike. On the other hand, disinflation describes a situation where prices are still rising but at a slower rate than before. This means that while inflation is present, it is decreasing, which can be seen as a sign of a stabilizing economy. Recognizing this distinction is crucial in understanding economic conditions and the implications for monetary policy. Disinflation can occur during periods of economic growth when demand is still strong but is moderated, whereas deflation is often associated with recessionary periods and can lead to a downward spiral in economic activity, as consumers and businesses postpone spending in anticipation of lower prices. This concept helps in grasping how these terms relate to broader economic indicators.