Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What is deflation?

1. A general rise in the price level of goods

2. An increase in purchasing power of money

3. A general drop in the level of prices across the economy

4. A period of economic stability and growth

The correct answer is: A general drop in the level of prices across the economy

Deflation refers to a general drop in the level of prices across the economy. This phenomenon occurs when there is a decrease in the overall price level of goods and services, typically due to a decline in demand or an oversupply of goods. When prices fall, the value of money effectively increases, allowing consumers to purchase more goods and services with the same amount of money. In an environment of deflation, the purchasing power of money rises, enabling consumers to afford more than they could when prices were higher. It can lead to a decrease in consumer spending as people may delay purchases in anticipation of even lower prices in the future. This can create a negative cycle that adversely affects businesses and the overall economy. The other descriptions do not align with deflation. A general rise in the price level indicates inflation rather than deflation. An increase in purchasing power of money can occur during deflation but does not encompass its complete definition. A period of economic stability and growth is typically associated with stable or rising prices rather than falling prices, which is indicative of deflationary trends.