Deflation is best described as which of the following?

• A. It occurs when unemployment rate falls
• B. It occurs when the average price level rises
• C. It occurs when the average price level declines
• D. It occurs when economic activity rises

Answer: (C)

Deflation is a sustained fall in the general price level. It means that, on average, the prices of goods and services are decreasing over time, which is the opposite of inflation and is tracked by measures like the CPI or the GDP deflator. Deflation can occur when demand for goods and services weakens or when productivity improvements push costs down, but it often has tricky economic consequences: it can increase the real burden of debt and lead people to delay purchases in hopes prices will drop further, potentially slowing economic activity.

This description fits best because it captures the idea of a declining average price level. The other statements describe situations that are about unemployment, rising prices, or rising economic activity, none of which define deflation.