Final answer:
Moving from inflation to deflation indicates a decrease in the price level and an increase in the money's purchasing power. Historical instances of deflation include the post-1920-21 recession and the Great Depression. Deflation poses challenges for stimulating economic activity during recessions.
Step-by-step explanation:
When we transition from a period of inflation to a period of deflation, the price level decreases. During inflation, the purchasing power of money decreases, which means it takes more money to buy the same amount of goods and services. In contrast, deflation is characterized by an increase in the purchasing power of money. This means that with deflation, less money is required to purchase the same amount of goods and services. Historically, there were periods of deflation following major economic events, such as the 1920-21 recession and the Great Depression of the 1930s.
Deflation can present significant challenges for monetary policy aimed at addressing economic downturns because as money increases in value, consumers and businesses may delay purchases, anticipating lower prices in the future. This can lead to reduced economic activity and a further deepening of the recession.