Deflation is best described as which of the following?

• A. Decline in prices; reduction of currency, opposite of inflation, can increase employment.
• B. People do not spend; demand disappears (why buy something when price will likely drop?)
• C. The Great Depression was caused by extreme deflation
• D. Central bank will lower interest rate to promote investment

Answer: (B)

Deflation means a general decline in prices. A key pattern during deflation is weak demand, where people postpone purchases because they expect prices to fall further. This leads to lower current spending, which reduces overall demand and can push prices down even more, creating a downward spiral. The option that best captures this dynamic says people don’t spend because they anticipate prices will drop, causing demand to disappear. The other statements mix in related ideas but don’t describe deflation itself: deflation isn’t defined as a reduction of currency, and it doesn’t reliably imply higher employment; the Great Depression’s causes are more complex than just deflation; and lowering interest rates is a policy response, not a definition of deflation.