Question

Deflation tends to occur when:

1) the buying power of money in terms of goods and services increases.

2) the buying power of money in terms of goods and services decreases.

3) the spending power of money in terms of goods and services increases.

4) the spending power of money in terms of goods and services decreases.

Please give the answer, and explain what the difference is between spending power and buying power. Thanks!!

Answer 1

The correct answer is 1) the buying power of money in terms of goods and services increases.

Deflation is a decrease in the general price level of goods and services in an economy over time. It occurs when the supply of money in an economy is greater than the demand for money. When there is deflation, the buying power of money increases, meaning that a given amount of money can buy more goods and services than before.

The difference between spending power and buying power is that spending power refers to the amount of money that a consumer has available to spend, while buying power refers to the amount of goods and services that can be purchased with a given amount of money. Spending power is influenced by factors such as income, savings, and debt, while buying power is influenced by the general price level of goods and services in an economy.