Deflation

B is correct. During deflation, cash and high-quality fixed-income securities perform best because the purchasing power of money increases as prices fall. Fixed bond payments become more valuable in real terms, and holding cash allows purchasing power to grow.

A is incorrect because commodities and real assets typically decline during deflation as demand weakens and prices fall across the economy. C is incorrect because companies with high debt are hurt during deflation, as they must repay loans with dollars that are worth more in purchasing power terms. Growth stocks also suffer as economic activity contracts. D is incorrect because emerging market currencies often weaken during global deflationary periods as economic weakness spreads.

B is correct. Deflation means prices are actually falling (negative inflation rate, such as -2%), while disinflation means the rate of inflation is decreasing but still positive (such as inflation slowing from 5% to 3%). Both terms describe changes in price levels but represent fundamentally different economic conditions.

A incorrectly confuses deflation with hyperinflation concepts and provides inaccurate thresholds. C incorrectly suggests deflation is limited to consumer goods, when deflation describes general price level declines across the economy. D incorrectly focuses on measurement periods rather than the actual economic phenomena being measured.

B is correct. A declining CPI indicates deflation, as the general price level is falling quarter over quarter. The CPI dropped from 248.5 to 243.7, a clear pattern of sustained price decreases that defines a deflationary environment.

A incorrectly interprets the absolute CPI level rather than the trend. The CPI is an index number where the level itself doesn't indicate inflation or deflation; the direction of change determines the condition. C is incorrect because disinflation describes slowing positive inflation, not falling prices. D is incorrect because stagflation describes simultaneous high inflation and economic stagnation, not the declining prices shown in the data.

C is correct (the EXCEPT answer). During deflation, borrowers are HURT, not helped. As prices fall and money becomes more valuable, debtors must repay loans with dollars that have greater purchasing power than when they borrowed. This increases the real burden of debt, which is the opposite of what occurs during inflation.

A is accurate: Deflation increases the purchasing power of money as the same dollar buys more goods and services when prices fall. B is accurate: Deflation can create a spiral where consumers delay purchases anticipating lower prices, which reduces demand and causes further price declines. D is accurate: Deflation is measured by negative changes in the CPI, indicating falling prices across the economy.

A is correct. Only statements 1 and 3 are accurate.

Statement 1 is TRUE: Central banks combat deflation through expansionary monetary policy, including lowering interest rates, quantitative easing, and increasing money supply to stimulate demand and halt falling prices. The Federal Reserve would take such actions to prevent deflationary spirals.

Statement 2 is FALSE: Fixed-rate mortgage borrowers are HURT by deflation, not helped. While their nominal payment stays the same, they must repay the loan with dollars that have increased in purchasing power, increasing the real burden of the debt.

Statement 3 is TRUE: Retirees with fixed pension income benefit during deflation because their fixed dollar payments buy more goods and services as prices fall, increasing their purchasing power.

Statement 4 is FALSE: Despite falling equipment costs, businesses typically reduce capital investment during deflation due to weak demand expectations, declining revenues, and uncertainty about economic conditions. The deflationary environment creates a negative business outlook that outweighs any cost savings.