What is deflation?

Deflation refers to a sustained decrease in the general price level of goods and services across an economy. This means that, on average, prices fall, leading to an increase in the purchasing power of money; consumers can buy more with the same amount of currency. Deflation often arises from a decrease in demand or an increase in the supply of goods and services that outpaces demand. A significant concern with deflation is that it can lead to reduced consumer spending, as individuals anticipate lower prices in the future, which can slow economic growth and lead to higher unemployment rates.

The other choices present different economic concepts. An increase in the price level describes inflation, not deflation; this shows a rise in prices rather than a fall. An increase in the money supply could potentially lead to inflation rather than deflation if it spurs demand without corresponding increases in production. Lastly, a temporary reduction in prices during sales events reflects promotional pricing strategies and does not signify a sustained decline in prices across the entire economy, which is the hallmark of deflation. Thus, identifying deflation correctly as a decrease in the general price level helps in understanding its broad implications on the economy.