UPSC Prelims 2010 Q19: Indian Economy – Inflation & Price Indices
- (a) It is a sudden fall in the value of a currency against other currencies
- (b) It is a persistent recession in both the financial and real sectors of economy
- (c) It is a persistent fall in the general price level of goods and services
- (d) It is a fall in the rate of inflation over a period of time
Answer: (c) It is a persistent fall in the general price level of goods and services
Explanation
Correctly defining "deflation"
Deflation is a specific macroeconomic term, often confused with related but distinct concepts.
| Option | Verdict | Reason |
|---|---|---|
| (a) Sudden fall in currency value against other currencies | Incorrect | This describes currency depreciation, not deflation |
| (b) Persistent recession in financial and real sectors | Incorrect | This is closer to describing a broader economic depression/recession, not deflation specifically |
| (c) Persistent fall in the general price level | Correct | Deflation is precisely defined as a sustained, general decline in prices of goods and services across the economy |
| (d) Fall in the rate of inflation over time | Incorrect | This describes disinflation (slowing inflation), which is different from deflation (actual falling prices) |
Deflation vs related terms:
| Term | Meaning |
|---|---|
| Deflation | Persistent fall in general price level |
| Disinflation | Slowing rate of inflation (prices still rising, just more slowly) |
| Currency depreciation | Fall in a currency's exchange value |
Answer: (c) It is a persistent fall in the general price level of goods and services.
Why each option is right or wrong
- (a) Incorrect. This describes currency depreciation, a distinct exchange-rate phenomenon, not deflation.
- (b) Incorrect. This is a broader recession/depression description, not the precise definition of deflation.
- (c) CORRECT. Deflation is specifically a persistent, general fall in the price level of goods and services.
- (d) Incorrect. A falling inflation rate (prices still rising, just slower) describes disinflation, not deflation.
Key point
Deflation = a persistent, general fall in the price level of goods and services — distinct from disinflation (slowing inflation) and currency depreciation (falling exchange value).
Remember
Deflation: a persistent, general fall in the price level of goods and services — not disinflation or currency depreciation.
Common mistakes
- Confusing deflation with disinflation (a slowing inflation rate, not falling prices).
- Mixing up deflation with currency depreciation, an exchange-rate concept.
- Treating deflation as synonymous with a general economic recession.
Exam tip
Deflation = prices actually falling. Disinflation = inflation slowing down (prices still rising, just less). Keep these two terms separate.
Sources
- N. Gregory Mankiw — Macroeconomics (Worth Publishers): Money Growth and Inflation
- Ministry of Finance, Government of India — Economic Survey 2010–11 (Prices and Monetary Management)