In macroeconomics, what is the key difference between inflation and deflation?

• A. Inflation is a decrease in real GDP, while deflation is an increase in real GDP.
• B. Inflation means the unemployment rate rises, while deflation means the unemployment rate falls.
• C. Inflation occurs when the money supply falls, while deflation occurs when the money supply rises.
• D. Inflation is a sustained rise in the overall price level, while deflation is a sustained fall in the overall price level.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the definitions of inflation and deflation in macroeconomics. Inflation refers to a sustained increase in the overall price level of goods and services in an economy over a period of time.
2. Step 2: Recognize that deflation is the opposite of inflation, meaning it is a sustained decrease in the overall price level of goods and services in an economy over time.
3. Step 3: Note that inflation and deflation are not directly about changes in real GDP or unemployment rates, although these variables can be influenced by inflationary or deflationary pressures.
4. Step 4: Understand that inflation is generally associated with an increase in the money supply, while deflation is often linked to a decrease in the money supply, but the key difference lies in the direction of the change in the overall price level.
5. Step 5: Summarize the key difference: Inflation is a sustained rise in the overall price level, whereas deflation is a sustained fall in the overall price level.