University of Central Florida (UCF) ECO2013 Principles of Macroeconomics Practice Exam 1

Deflation is defined as a decrease in the general price level of goods and services in an economy over a period of time. This phenomenon indicates that prices are falling, which can lead to increased purchasing power for consumers, as the same amount of money can buy more goods and services than before. While deflation can seem favorable at first, it can lead to negative economic consequences, such as reduced consumer spending, as people may delay purchases in anticipation of even lower prices in the future. This can ultimately result in a slowdown of economic growth, increased unemployment, and increased debt burdens.

The other options describe different economic concepts. An increase in the general price level refers to inflation, which is the opposite of deflation. Increased demand for goods and services typically relates to economic expansion rather than deflation. Stability in prices over time indicates price equilibrium, which is neither deflation nor inflation, but rather a state of stability.