UPSC Prelims 2010 · General Studies

Question 19: Economy and Social Development

Which one of the following statements is an appropriate description of deflation ?

aIt is a sudden fall in the value of a currency against other currencies

bIt is a persistent recession in both the financial and real sectors of economy

cIt is a persistent fall in the general price level of goods and services

dIt is a fall in the rate of inflation over a period of time

AnswerThe answer is (c).

Deflation is a sustained fall in the general price level. It differs from disinflation, a fall in the rate of inflation while prices are still rising (option d), from sharp depreciation of a currency (a), and from a depression or deep recession (b). Deflation raises the real burden of debt, squeezes profits and often deepens a slump, but it is defined by falling prices alone. Remember: deflation = falling price level; disinflation = prices rising more slowly.

Why each option is right or wrong

(a) That describes sharp depreciation or devaluation of a currency.
(b) That describes a depression or deep recession, which can accompany deflation but is not it.
(c) Right: deflation is a persistent fall in the general price level.
(d) That is disinflation; prices still rise, only more slowly.

Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2010, General Studies, Series A. The paper on upsc.gov.in.