Consider the following statements:
- 1. When the inflation decreases, but still remains positive, it is deflation.
- 2. Deflation reduces the real value of money over time.
- 3. Historically not all episodes of deflation correspond with periods of poor economic growth.
Which of the statements given above is/are correct ?
1, 2 and 3
1 and 3 only
3 only
2 only
Answer is Wrong!
Answer is Right!
This question was previously asked in
UPSC CAPF – 2009
– Statement 2 is incorrect: Deflation increases the real value of money over time. If prices are falling, a fixed amount of money can buy more goods and services than before. Inflation, conversely, reduces the real value of money.
– Statement 3 is correct: While deflation is often associated with severe economic downturns (like the Great Depression), historical episodes exist where deflation occurred alongside economic growth, particularly during periods of significant productivity gains and technological advancements (e.g., late 19th century). This type of deflation, driven by falling production costs, can lead to lower prices for consumers without necessarily causing a recession.